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US govt is spending more than it earns

At a time when the US economy has barely weathered the storms of the past crises, it is racking up a huge debt instead of shoring up finances

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The Federal Deficit - the gap between how much the government takes in and how much it spends - will hit US$804 billion in fiscal 2018, up 21% from 2017, the Congressional Budget Office said.

Washington

THE US federal government is on track to have a US$1 trillion deficit in 2020 - and to continue running yawning deficits for years to come, the nonpartisan Congressional Budget Office predicted on Monday.

It's a report that should make Americans concerned, especially younger ones.

On a basic level, this means the United States government is spending way more money than it brings in. This is not a new problem. The US has been running a deficit every year since 2002, but the situation is about to get really ugly. The country has never run this high of a deficit during good economic times. If spending keeps up at this pace (and there is every indication that it will), President Donald Trump and his successors are going to have less flexibility to pump up the economy during a downturn or even a crisis.

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"This is unprecedented," said Justin Bogie, senior policy analyst on fiscal affairs at the conservative Heritage Foundation.

It doesn't mean the economy or stock market will crash tomorrow. The US is able to run such high deficits because the US Treasury turns around and sells US debt to investors around the world. Right now, a lot of people want to buy US government bonds, even though America already has US$15 trillion in debt owned by the public. But the problem is no one knows when people might say enough is enough and stop buying US debt - or demand much higher rates of return.

Didn't Obama run a US$1-trillion deficit? Some may recall that the US government did run trillion-dollar deficits each year from 2009 to 2012, but that was during a terrible economic period when America (and much of the world) was trying to climb back out of the global financial crisis and ensuing recession. The government spent heavily to try to revive the economy.

Now growth is healthy, unemployment is extremely low (4.1 per cent) and confidence is strong. In times like these, the US government has almost always narrowed the budget deficit - or even runs a surplus, as it did from 1998 to 2001, the end of the dotcom boom. But instead of improving the government's budget situation, Congress is going the opposite direction and adding to it, an alarming sign.

"We are running up the national credit card when everything is going our way economically," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. "It shows Congress has lost any will to make hard choices to fix near-record debt levels we're already facing."

What it means for you. To underscore how large the debt is getting, CBO notes that by 2028, the debt held by the public will be at the highest level (as a percentage of the US economy) since World War II.

A day of reckoning is likely to come at some point where the US will have to raise taxes or cut benefits and programmes that many people have come to rely on - or some combination of both.

Many Americans under 50 are likely to face some pain from this, and the under-35 population will likely be especially hard-pressed to pay more to the government while getting back far less than their parents and grandparents did. Spending on everything from Social Security to roads, research and schools could potentially decline.

How worried should I be? The United States government hasn't tested that level of debt - where debt held by the public equals the entire size of the US economy - in the modern era. It's why so many economists, from the left and right, have been warning Congress and the White House to act now before it gets that bad.

"The bigger the debt, the bigger the chances of a fiscal crisis," CBO director Keith Hall said Monday. "When do you start to fix a thing like this? The longer you wait, the more draconian the measures have to be to fix the problem. That's the biggest warning."

One of the places the US government typically looks at first to cut back on is so-called "discretionary spending", which means spending on education, housing for the poor, veterans benefits, scientific research, roads and bridges and other infrastructure.

The problem is that CBO forecasts that, a decade from now, America's interest payments alone will exceed discretionary spending on all non-military items combined. That means it's going to be harder and harder to find money in the budget to cut because the government can't stop paying interest (unless it wants to default, which would likely trigger even worse economic consequences).

Why do we have this problem? The US, like many advanced economies, has an ageing population (the share of people over age of 65 is double what it was half a century ago). That means more spending on programmes for the elderly such as Social Security, Medicare and Medicaid. It also means fewer workers with jobs who are paying taxes to support all the older Americans. That's a major driver of the deficits, but Mr Trump said he would not touch Social Security or Medicare on the campaign trail.

The government's other major expenditure is on defence, part of maintaining its global military supremacy. The Trump administration has continually pushed for large increases to military spending.

While Mr Trump campaigned on reducing the debt, he and the GOP-led Congress have made the deficit worse in the past year, according to CBO calculations. The massive tax cut, especially for corporations, is expected to cut government revenue by US$1.3 trillion over the next decade, CBO says. After taking into account rising interest rates, the tax bill will cost the country US$1.9 trillion over that time period.

Then there's the budget bill Congress just passed. It increased spending by about 10 per cent for both the military (a GOP priority) and domestic programmes (a Democratic priority).

CBO added it up: What Trump and Congress have done since June is "estimated to make deficits US$2.7 trillion larger than previously projected" in the next decade, CBO wrote in its report.

What can be done about it? Various bipartisan coalitions over the years, most notably the Simpson-Bowles coalition in 2010, laid out a path to addressing the debt that was attractive to many centrists: Make most Americans wait longer before they can collect Social Security.

Raise taxes a bit (this could be anything from raising the Social Security or Medicare tax to doing a tax on carbon or a special millionaires tax) and look for ways to trim Medicare and Medicaid spending by striking harder deals with providers and/or limiting some types of treatments.

These are not popular changes. But neither is getting into an economic crisis because the United States government has overspent so much for so long. Or facing a situation where millennials and younger generations have to pay off the debts of their parents and grandparents.

Some conservatives have argued for steeper cuts to social programmes, while progressives tend to eye big cuts to military spending.

Congress and the Obama administration agreed in 2013 to what was known as "budget sequestration". The idea was to impose mandatory caps on both social and defence spending that would be put in place unless both parties came together on a long-term budget deal.

The two sides never reached a deal, and so the caps went into place, driving down deficits during the final years of the Obama era.

Balanced budget amendment? Another solution that has been floated is a balanced-budget amendment. Republicans in Congress plan to vote on it this week, although almost no one expects it to pass. It's likely a symbolic vote for some lawmakers who want to try to show they are doing something to rein in the debt.

Many states have these, and there are calls to see if it's possible to do one at the federal level, although it would require a change to the US Constitution, a difficult process. It would also eliminate some aid to the economy in times of crisis. During and after the Great Recession, many states had to pull back spending sharply, cutting money for schools and, in some cases, having to lay off workers at a time when so many Americans were already struggling to find work. This situation can exacerbate downturns.

While many agree something needs to be done to get America's budget back to a healthier level, even the so-called "budget hawks" look at the vote this week and shake their heads.

"Every person who supports the balanced budget amendment should be required to actually put forward a budget that balances," said Ms MacGuineas. "Congress certainly made terrible policy choices in the past couple of months, starting with the gallingly irresponsible tax cut." WP

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