Able and Willing?
Where the willingness is great, the difficulties cannot be great.
Niccolo Machiavelli
Question: What are your thoughts on the US National Debt problem?
Answer: The problem with the U.S. debt isn’t the ability to pay but the willingness to pay. Debt issue are a heated topic for political and ideological reasons. We’ll do are best to stay away from politics and focus on the fundamental economic aspects of the debt discussion.
To pay its debt, the US political system must be willing to commit itself to improving and solving the US primary deficit problem. The issue is easily understood; spending exceeds income and revenue resulting in a fiscal deficit. In contrast, if the US collects more in taxes than what it spends, we’d have a fiscal surplus.
To understand what a debt level of $34 trillion means, we’ll breakdown the difference between public debt and intragovernmental debt. Gross debt is the $34 trillion, which includes US government debt held by the government, and US government debt held by the public. Public debt is owed to individuals and institutions outside the federal government. Public debt is approaching $26 trillion and doesn’t include intragovernmental debt. We’ll focus on public debt, which is the only component of the debt that could default.
One last explanation between the deficit and the debt; deficit is measured quarterly and added to the debt. The debt, or primary balance is the difference between what the government receives in revenues minus expenditures excluding interest payments. A growing primary deficit could put our country’s finances on an unmanageable path.
In 2000, the US debt was close to $5.8 trillion or 54% of Gross Domestic Product. Debt held by the public was $3.4 trillion or 32% of GDP. This was on a downward path due to fiscal surpluses at the end of the 1990’s in the early 2000’s. Following September 11, 2001, deficits and debt pushed higher and was worsened by the Great Recession, and more intensely so during and after the Covid-19 pandemic as a result of accumulating deficit spending. The US has not recorded a fiscal surplus since 2001. With the cost of the current US debt including interest payments, this will continue to increase for the near future.
A solution to the snowballing problem would take a political decision to agree on slowing down the growth rate of expenditures, increasing tax rates and/or tax revenues, or a combination of both for a slowdown in the growth in expenditures and higher tax revenues. That’s why it's impossible to avoid the political nature of the topic, especially in light of the political environment in D.C. with difficult choices needing to be made
Interest expense places a great deal of stress on the budget. Approximately two-thirds of expenditure programs are determined by law and cannot be unfunded. The remaining one-third is discretionary spending, and no politician on either side of the aisle wants to see their portion of this chunk reduced. This makes the problem political rather than economic, therefore the reference to “willingness” versus “ability” to pay.
According to the PENN WHARTON Budget model from the University of Pennsylvania, “under current policy, the US has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly.” Translation is that without immediate corrective action, the end game would be to monetize the debt which leads to greater inflation.
We have identified the problem, now it’s time for a solution before international capital markets close down and stop financing US debt by purchasing our Treasury Debt. In 2011, Standard & Poor’s downgraded US debt based on the unwillingness of the US political system to take the necessary steps towards debt reduction rather than its ability to pay its debts.
Reducing fixed or mandatory expenditures requires agreements and political harmony between the parties in Congress to make changes. Cutting discretionary (non-fixed) expenditures requires agreements between the executive branch and Congress. Willingness transcends political beliefs. We have the ability, yet require motivation, eagerness, commitment, and cooperation in order to move forward and make necessary changes. In the meantime, we’ll continue to watch for slowed growth due to potentially increasing taxes and reduced government expenditures to ease the pressure on the growing deficit and debt levels. To answer your question, the US needs to look for a real solution to its debt problem before it’s too late and too difficult to change the trajectory of the problem. Stay focused and plan accordingly.
Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. The opinions expressed are those of the writer as of February 18, 2024, but not necessarily those of Raymond James & Associates, and subject to change at any time based on market conditions and other factors. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification.
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