No country should run fiscal affairs as high drama. Greece in 2015 and the UK last year offer cautionary tales of what goes wrong when politics and the public finances collide. Yet the US does not feel it needs to learn lessons from other countries. It is, instead, heading for its own political clash over its $31.4tn debt ceiling, perhaps as early as next month. Everyone is being asked to pick their heroes and villains in the coming fight and the stakes are high.
But for those of a more technocratic bent, who can put to one side the coming debt ceiling politics, the underlying health of the US public finances are just as alarming.
The US federal budget is haemorrhaging money. The non-partisan Congressional Budget Office calculates that in the first seven months of the 2023 fiscal year, underlying government revenues are down 10 per cent with spending up 12 per cent. This leaves the federal budget deficit more than three times larger than in the same months of the 2022 fiscal year.
Weak receipts reflected lower realised capital gains than the CBO expected in late 2022, the transformation of the Federal Reserve’s quantitative easing programme from a cash cow to a significant burden and the possibility that the underlying recovery was not quite as healthy as initial statistics showed. Expenditure has risen sharply in almost all large federal budget areas.
If the patterns of the first seven months continue, it will extend an unfortunate trend in US budgeting. Not only does the CBO expect the deficit to grow in the years ahead, it also tends to overestimate the original health of the public finances.
Any search for relief from less-volatile longer-term US fiscal numbers will also fail. The CBO’s latest forecasts show the level of federal debt held by the public as a share of national income to be 98 per cent in 2023, just 7.6 per cent below its wartime peak in 1946 and on track to exceed it in 2028. For comparison, UK public debt, also at a multi-decade high relative to gross domestic product, is still less than half the level it was at the end of the second world war.
The rapid rise in US public debt reflects the terrible state of US politics. Republicans only discover fiscal prudence when they are in opposition before cutting taxes when holding office. Knowing this, the Democrats have given up on fiscal prudence and instead promote huge, and often uncapped, spending programmes such as the Inflation Reduction Act.
The result is that the US is eroding its position in every long-term international comparison on public finance strength. To make a comparison with eurozone countries that required support in the 2010s, Portugal, Ireland and Spain already have lower gross debt levels than the US, IMF forecasts show US debt set to exceed that in Italy by 2028 and Greece by the end of the decade.
Of course, in a world of low interest rates, countries can live happily with slightly higher debt levels and do not have to pay off their borrowing. Olivier Blanchard’s work at the IMF and Peterson Institute taught us this. But comfortably higher debt does not mean borrowing almost without limit. Blanchard himself worries that, “the debt trajectory in the US is not sustainable on current policy”.
Polarised politics might ensure that the US cannot pay all of its bills in the weeks ahead. This repetitive theatrical performance is beginning to consume financial markets. But it is likely to be resolved after some potentially hairy moments.
The real tragedy of the US public finances is their chronic weaknesses. This will not generate a sudden crisis and shows no sign of resolution. Ultimately, it is much more damaging. They will get worse as the US population ages, undermine the dollar as the world’s reserve currency and weaken America’s ability to project economic power on a global scale.
chris.giles@ft.com
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