For the first time since the aftermath of the Great Recession, the budget deficit is on the rise again, prompting concern among some budget analysts and policy makers that the government could face a new era of mega revenue shortfalls and runaway spending on major entitlement programs, defense and domestic programs.
The non-partisan Congressional Budget Office (CBO) reported on Friday that the deficit for the fiscal 2016 year that ended Sept. 30 would total $588 billion, or roughly a third greater than the deficit registered the previous year. While total spending rose by $178 billion or five percent to $3.9 trillion throughout 2016, revenues remained relatively flat, causing the widening gap.
The CBO has repeatedly warned that -- absent dramatic shifts and reforms in government spending, tax and entitlement programs – the country will again incur the trillion-dollar annual budget deficits that marked the early years of the Obama administration when the nation was suffering through its worst economic crisis and recession in modern history. The latest surge in red ink reverses a trend begun in 2009 of gradually shrinking deficits as the economy recovered and Congress and the administration imposed caps on discretionary spending.
“If current laws generally remained unchanged—an assumption underlying CBO’s baseline projections—deficits would continue to mount over the next 10 years, and debt held by the public would rise from its already high level,” CBO said in its latest budget update.
The new CBO analysis comes as Democrat Hillary Clinton and Republican Donald Trump prepare to square off Sunday night in the second nationally televised presidential debate on the campus of Washington University in St. Louis.
Concerns about the mounting national debt received only glancing mention during the first debate in New York two weeks ago. And with the weekend uproar over the revelation of a decade-old video tape of Trump’s crude sexual remarks dominating the political scene, it’s not likely that there will be much time, if any, devoted to the long-term debt tonight.
Trump and Clinton for months have engaged in a fierce bidding war for voter allegiance with costly domestic and defense spending and tax proposals that could drive the historic $14.1 trillion publicly held debt much higher in the coming decade.
Clinton’s proposals, including expanded health care and Social Security benefits, free college tuition for many low and middle-class students, paid family leave and a massive new program of spending on highways, bridges and other infrastructure would add $200 billion to the debt over the coming decade, according to an analysis by the Committee for a Responsible Federal Budget.
But that would be premised on congressional passage of about $1.5 trillion of new taxes on wealthy Americans and businesses to offset most of the cost of those spending initiatives. Whether Clinton as president could persuade Democratic and Republican leaders to go along with such a substantial tax hike is highly speculative at best.
By contrast, Trump’s proposals, including a major tax cut for individuals and businesses, a build-up of U.S. defenses, a crackdown on illegal immigrants and new infrastructure projects would add $5.3 trillion to the debt in the coming decade, according to the CRFB analysis. Although Trump has scaled back his tax cuts considerably from earlier versions -- and insists they would pay for themselves through economic growth -- the proposed $4.3 trillion in individual and business tax cuts over the coming decade would be extraordinary.
Without any changes in current law, debt held by the public (the money borrowed by the Treasury to help repay government obligations and smooth out revenue flows) is projected to grow by $9 trillion over the coming decade, from $14.1 trillion this year to $23.1 trillion, according to CBO estimates. The gross national debt – including internal government borrowing – is projected to grow by about $8.8 trillion over the next decade, from the current $19.4 trillion to $28.2 trillion.
If Clinton were to succeed in pushing through her fiscal and budgetary plans, publicly held debt would reach $23.3 trillion over that same period – or 86 percent of Gross Domestic Product, according to CRFB. By contrast, Trump’s proposals would drive publicly held debt to $28.4 trillion over the decade, or 105 percent of GDP.
Democrats, Republicans and government spending watchdogs are divided over fiscal policy and whether more deficit spending in the coming years will provide added impetus to the economic recovery or plunge the government in dire financial straits. Liberal Democrats argue that more spending and borrowing would provide a much needed boost to the economy, while conservatives and deficit hawks fret about mounting entitlement costs and an “unsustainable” debt
In its latest report, CBO warned that rising debt fueled by mounting Social Security and Medicare obligations as more and more baby boomers retire would have “serious negative consequences for the budget and the nation.”
For instance, federal spending on interest payments would increase substantially; federal borrowing would reduce total savings in the economy; productivity and total wages would be lower; and lawmakers would have less flexibility to use tax and spending policies to respond to unexpected challenges and crises.
“The likelihood of a fiscal crisis in the United States would increase,” CBO stated. “There would be a greater risk that investors would become unwilling to finance the government’s borrowing needs unless they were compensated with very high interest rates; if that happened, interest rates on federal debt would rise suddenly and sharply.”