Question

For fiscal year 2019, the U.S. federal deficit was $984 billion and the national debt grew to $22.8 trillion. (You can find real-time numbers for the deficit, debt, and much more at US Debt Clock.) The Congressional Budget Office (CBO) projects federal deficits to exceed $1 trillion each year beginning in 2022 if current laws do not change. In 2019, federal debt held by the public was 78% of GDP, with the CBO projecting that to rise to more than 92% by 2029. In an April 2018 report, the Cato Institute stated that the United States is the only advanced country expected to show an increasing debt-to-GDP ratio through 2023*.

• What is the difference between the federal deficit and the national debt?
• What are the economic consequences of a rising federal deficit and national debt?
• Should we be concerned about the sizes (and projected increases) of the deficit and debt? Why or why not?
• Who exactly do we owe this money to, and does this make a difference in terms of our level of concern?
• What can the government do to reduce the deficit numbers? Be specific, explaining how the numbers would be reduced, and if the government actually should use these methods of deficit reduction.
• How has federal spending changed as a result of COVID-19, and what do you think this will do to the projections of the overall federal deficit and debt?

Answer 1

- Federal deficit is the difference between Revenue and Expenditure. Thus there is a deficit when the expenditure component is higher than revenue. Where as national debt is the total amount of money which a government borrows in order to finance its expenditure.

- Economic consequences of a rising fiscal deficit and national debt are that the government is left with less resources to fund its capital expenditure and other investment building projects where long term growth is assured, instead it has to spend most of the revenue it collects on repaying the interest payments. Increase in national debt reduces scope for spending on R&D, education and infrastructure. Where rising fiscal deficit leads to inflation as the money in circulation increases. While there is crowding out due to increased government borrowing, interest rates rise and this leads to private investments slowing down.

- We should be concerned about the rising deficit and debt if the deficit is highly unstable and the national debt is far more than as a percentage of GDP. Currently the U.S Federal debt ratio as a percentage of GDP is 138%, which is significantly higher. Whereas National debt as a percentage of GDP is far higher at 155%, which is a cause of concern. As the debt is more than the GDP, and GDP is shrinking because of the pandemic. Thus a debt to GDP ratio of more than 100% is a cause of concern.

- We owe this money to the overseas/domestic investors and governments who invest in U.S government bonds and it does make a difference in terms of level of concern if most of the borrowings are from one government such as China, etc as the external debt to GDP ratio is quite high at 130%. Other countries will easily be able to influence terms of trade which could detriment the freedom of the U.S government to make decisions.

- The government can increase tax rates on the super rich and increase the revenue base, it can spend the revenue base on capital expenditure where future growth is assured, instead of spending on discretionary means such as military spending. Thus it can increase the revenue base, reduce government spending on discretionary expenditure and increase spending on building capacities so as to achieve faster economic growth rate and thus increase the revenue base further.

- The federal budget spending has increased on Medicare and Medicaid services, more money is being spent on transfer payments such as unemployment insurance and other forms of compensations. Thus the governments expenditure has increased on relief and response measures while revenue base has fallen because several businesses were non functional during lockdown. The projections of the overall federal deficit are expected to rise as the deficit is increasingly being funded by the debt.