No country should mess up its fiscal affairs. Greece in 2015 and Britain last year provide cautionary tales of what can go wrong when politics and public finances collide. However, the United States does not see a need to learn lessons from other countries. Instead, it could start its own political conflict over the $31.4 trillion debt ceiling as early as next month. Each is asked to choose their heroes and villains in the upcoming battle, and the stakes are high.
But for those more technocratic, who can put the impending debt-ceiling politics aside, the underlying health of America’s public finances is equally worrisome.
The U.S. federal budget is bleeding money.nonpartisan congressional budget office Calculate In the first seven months of the 2023 fiscal year, basic government revenue fell by 10%, while spending rose by 12%. That leaves the federal budget deficit more than three times higher than the same month in fiscal 2022.
Weaker earnings reflect lower-than-CBO expectations for realized capital gains by the end of 2022, the shift of the Fed’s quantitative easing program from a cash cow to a major liability, and the potential recovery that may not be as healthy as preliminary statistics suggest. Spending rose sharply in nearly all large federal budget areas.
If the pattern of the first seven months continues, it will continue the unfortunate trend of US budgeting. Not only does the CBO project higher deficits in the coming years, but it tends to overestimate the raw health of public finances.
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Any attempt to find relief from less volatile long-term U.S. fiscal data will also fail.congressional budget office latest forecast It shows that the level of federal debt held by the public will reach 98% of national income by 2023, just 7.6% below the wartime peak in 1946, and is on track to exceed that level by 2028. By contrast, UK public debt, also at multi-decade highs relative to gross domestic product, is still less than half the level it was at the end of World War II.
The rapid rise in US public debt reflects the dire state of American politics. Fiscal prudence was only found in opposition when Republicans cut taxes while in office. Knowing this, Democrats have abandoned prudent fiscal policy in favor of massive and often unlimited spending programs such as the Inflation Reduction Act.
The result is that the United States is weakening in every long-term international comparison of the strength of public finances. Portugal, Ireland, and Spain already have lower aggregate debt levels than the United States, compared to eurozone countries that needed support in the 2010s, IMF forecasts suggest that US debt will exceed Italy’s by 2028 and Greece’s by the end of the decade.
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Of course, in a world of low interest rates, countries can live happily with slightly higher debt levels without having to pay off their borrowings.Olivier Blanchard’s Working at the International Monetary Fund The Peterson Institute taught us this. But comfortably increasing debt doesn’t mean borrowing almost unlimited.blanchard himself to worry about That said, “the U.S. debt trajectory is unsustainable under current policies.”
Polarized politics may ensure that the US cannot pay all its bills in the coming weeks. This repetitive theatrical performance began to consume financial markets. But it might work out after some potentially hairy moments.
The real tragedy of America’s public finances lies in their chronic weaknesses. This will not produce a sudden crisis, and there is no sign of a resolution. Ultimately, it’s far more destructive. They will get worse as the U.S. population ages, undermining the dollar’s status as the world’s reserve currency and reducing America’s ability to project economic power globally.
chris.giles@ft.com