America’s national debt just hit another sobering milestone.
Total public debt outstanding is now above US$30 trillion, according to Treasury Department data published Tuesday.
Government borrowing accelerated during the COVID-19 pandemic as Washington spent aggressively to cushion the economic blow from the crisis. The national debt has surged by about $7 trillion since the end of 2019.
It’s impossible to know how much debt is too much, and economists remain divided over how big of a problem this really is. But the latest debt milestone comes at a delicate time as borrowing costs are expected to rise.
After many years of rock-bottom interest rates, the Federal Reserve is shifting into inflation-fighting mode. The Fed is planning to launch its first series of rate hikes since 2015. Higher borrowing costs will only make it harder to finance that mountain of debt.
“It doesn’t mean a short-term crisis, but it does mean we are going to be poorer in the long term,” said David Kelly, chief global strategist at JPMorgan Asset Management.
Interest costs alone are projected to surpass $5 trillion over the next 10 years and will amount to nearly half of all federal revenue by 2051, according to the Peter G. Peterson Foundation, an organization focused on raising awareness to the fiscal challenge.
Kelly pointed out that rising borrowing costs will limit how much money Washington can spend on other priorities like climate change.
SKYROCKETING PILE OF DEBT
The federal government now owes almost $8 trillion to foreign and international investors, led by Japan and China. Eventually, that will need to be paid back, with interest.
“That means American taxpayers will be paying for the retirement of the people in China and Japan, who are our creditors,” said Kelly.
The $30 trillion national debt figure is somewhat inflated by the fact that a chunk of the money is owed by the government to itself. This is debt held in Social Security and other government trust funds. So-called intragovernmental holdings total more than $6 trillion.
Still, the national debt has skyrocketed in recent decades, driven up in part by the 2008 financial crisis and then the pandemic.
Total debt outstanding stood at $9.2 trillion in December 2007 just as the Great Recession was beginning, according to Treasury data.
By the time former U.S. President Donald Trump took office, the national debt stood at nearly $20 trillion.
“COVID exacerbated the problem. We had an emergency situation that required trillions in spending,” said Michael Peterson, CEO of the Peterson Foundation. “But the structural problems we face fiscally existed long before the pandemic.
Even before COVID-19, Trump presided over a sharp increase in the national debt, highlighted by the massive tax cuts enacted in late 2017 — at a time when the US economy was booming and needed no fiscal stimulus. The 2017 Tax Cuts and Jobs Act will add $1 trillion to $2 trillion in federal debt between 2018 and 2025, according to the Tax Policy Center. The centre notes that the impact will be even larger if some of the temporary tax cuts are extended.
Peterson said the principal drivers of the “dangerous fiscal situation” remain an aging population and elevated healthcare costs. He blamed Republicans and Democrats alike for running up the national debt.
“Our current fiscal posture is a result of many years of fiscal irresponsibility from both parties. What’s required to get us out of this situation is honesty and leadership from our elected officials,” Peterson said.
Yet there has been virtually no progress in Washington in addressing the national debt ,and the two parties remain deeply divided over many issues.
“The polarization of our government and, to some extent, our population, makes implementing solutions more difficult,” said Peterson. “If we don’t get our fiscal house in order, all these other concerns like climate, inequality and national security will be made more difficult.”
About two-thirds (67%) of Americans in a CNN poll in December said government spending is a major problem for the nation’s economy, below rising costs for food and everyday items (80% said that was a major problem) and roughly on par with the pandemic (65% said COVID-19 is a major problem).
There is a wide partisan gap on this issue, with 90% of Republicans calling government spending a major problem, compared with 70% of independents and 44% of Democrats.
‘ADDICTED TO GOVERNMENT DEBT’
Federal Reserve Chairman Jerome Powell recently acknowledged the fiscal situation can’t continue on the current trajectory.
“We’re on an unsustainable path,” Powell told lawmakers last month. “Debt is not at an unsustainable level, but the path is unsustainable — meaning it’s growing faster than the economy, meaningfully faster than the economy. We have to address that over time. We will address it over time. And the better way to do it is soon.”
But that won’t be easy — or politically popular. And it will be complicated by the Fed’s planned interest rate hikes.
Even though the national debt continues to hit new milestones, the federal government’s interest payments as a percentage of GDP are lower today than in the past. And that gives confidence to many economists that this is not an immediate crisis.
In 2021, interest as a percentage of GDP stood at 1.5%, compared with 3% in the early and mid-1990s, according to the St. Louis Federal Reserve Bank.
“I don’t see a short-term meltdown here,” said Kelly, the JPMorgan strategist.
But he said it still makes sense to reduce the national debt — gradually.
“You don’t want to do it too quickly. This is an economy that is addicted to government debt,” Kelly said. “But the danger is that it keeps growing until eventually it does cause a huge problem.”