Back in the bad old days of the Great Recession, the Government ran four consecutive terms of a federal budget deficit surpassing $1 trillion. But as our economy gradually recovered, the deficit fell steadily from $1,413 billion ($1.413 trillion) in fiscal year 2009 to just $438 billion in 2015.
Most of that decline was due to a steady drop in our unemployment rate from double-digit levels to just over four percent in recent months. As the unemployment rate fell, government spending on unemployment insurance benefits went down as well.
As our economic expansion continues, still more people will find jobs, while personal income, corporate profits and government tax receipts will climb.
To ensure that we fully recovered from the Great Recession, the Federal Reserve kept interest rates at very low levels until just last year. This greatly lessened the interest payments that the U.S. Treasury had to make on our massive federal debt.
But now the forces than have been holding down the deficit have begun to reverse themselves. In fiscal year 2016 the deficit rose to $585 billion, and then in fiscal year 2017 (which ended on September 30, 2017), to $666 billion.
Still, even if the Federal budget deficit continues to creep up, it won’t reach $1 trillion for years – if at all. Right?
Even last month’s massive tax cut is projected to add an average of no more than $140 billion to the Federal budget deficit in each of the next ten years. Indeed, some optimists in the Trump Administration believe that it will not raise the deficit at all. Regretfully, it has been hard to find more than a handful of economists who would agree with that assessment.
What can we expect to happen over the next ten years, and how will those events affect the Federal budget deficit?
As long as our economy remains at or near full employment, and as concerns begin to rise about inflation, it is likely that the Federal Reserve will continue to very gradually raise interest rates. This will have a profound effect on the deficit.
Each year nearly one third of the national debt matures, and the U.S. Treasury needs to sell new Treasury bonds, bills, and notes to refinance the debt. Let’s do the math.
How much would interest payments rise if the interest rate were to go up by one percent? Hint: multiply $20 trillion by 0.01.
If you do this calculation, you would find that interest payments would rise by $200 billion: $20,000,000,000,000 x 0.01 = $200,000,000,000.
As this process continues from year-to-year, we will get caught in a vicious circle. Rising interest payments will raise the deficit. This deficit will be tacked on to the national debt. Interest payments on the national debt will then rise, thereby raising the deficit still further.
But wait: it gets a lot worse! There’s talk among Congressional Republicans of holding down deficit increases by cutting entitlements, which account for most of federal spending. Indeed, just the big three – Social Security, Medicare, and Medicaid – are responsible for 54 percent of the federal government’s budget.
Federal budget deficit and entitlement spending
Let’s consider this question: If the Republicans try to cut Medicare and Social Security payments in an election year, what do you think will happen? Keep in mind that senior citizens are more likely to vote than other population groups.
Even cutting Medicaid, which provides health care to the poor, would not be too popular among some older voters. That’s because Medicaid pays nearly three-quarters of the nursing home expenses of the elderly.
So forget about reduced spending on Social Security, Medicare, and Medicaid – unless there are targeted cuts in Medicaid aimed at poor people under 65. Given the slim Republican majority in the Senate, just two Republican Senators could easily block any cuts to these entitlements. And then, too, the Republicans might lose control of the House, the Senate, or both in November’s Congressional election.
Over each of the next ten years, about four million baby boomers will begin collecting Social Security and Medicare benefits. The spending on these programs will continue to climb, adding tens of billions to the federal budget deficit each year.
Either this month or next, Congress will probably pass a substantial increase in military spending, and also provide tens of billions in additional aid to hurricane victims in Texas, Louisiana, Mississippi, Florida, and other states, and possibly to those in Puerto Rico and the US. Virgin Islands as well.
Optimistic numbers? Federal budget deficit could explode even higher when expansion ends
If all that is not enough to convince you of the prospect of sharply rising deficits, let’s consider that we may well be in the last phase of the second longest economic expansion in our nation’s history. The longest on record – from April 1991 through February 2001 — lasted almost ten full years. If the current expansion continues, we will break that record in May of next year.
Although the recent tax cut will provide some short-term stimulus, a lot of other events could drive our economy into a recession at any time. When that does happen, our deficit will go through the roof.
In the coming years, there will be rising Federal budget deficit as far as the eye can see. The big question is not whether we will have trillion-dollar deficits, but how soon they will arrive.
About the Author
Steve Slavin has a PhD in economics from NYU, and taught for over thirty years at Brooklyn College, New York Institute of Technology, and New Jersey’s Union County College. He has written sixteen math and economics books including a widely used introductory economics textbook now in its eleventh edition (McGraw-Hill) and The Great American Economy (Prometheus Books) which was published in August.