Impact of the U.S. Federal Deficit and National Debt

Following the COVID-19 pandemic, the U.S. federal government’s deficit and national debt have surged, raising concerns about their impact on the economy and financial markets. The deficit, representing the annual mismatch between revenues and expenditures, and the accumulated debt have become central topics of discussion among economists and policymakers. In this article, we will examine the scale of the issue, its historical and current implications for the economy, and its impact on financial markets.

Current Situation with Deficit and Debt

In the first seven months of the 2024 fiscal year, the deficit reached $855 billion, slightly below the $925 billion recorded for the same period in 2023. However, the cumulative deficit over the past 12 months has reached $1.6 trillion, equivalent to 5.8% of the U.S. GDP. Consequently, the national debt has exceeded $34 trillion, approximately 120% of GDP, or more than $100,000 per U.S. resident.

Historical Consequences of Government Spending

Historically, high government spending has often coincided with lower economic growth. The increase in government spending as a percentage of GDP to 23% in 2024, although below the pandemic peak, remains above historical averages. At the same time, rising interest payments on the debt have become a significant expenditure, which the Congressional Budget Office (CBO) projects will continue to grow, reaching nearly 4% of GDP within the next decade.

Impact on Financial Markets

Despite concerns about the growing supply of Treasury securities, demand for them remains stable. U.S. Treasuries continue to be in high demand among domestic and foreign investors due to their reliability and liquidity. Furthermore, the role of the U.S. dollar as the world’s reserve currency supports the high demand for Treasuries, despite the increasing debt.

There is no historical correlation between the level of debt and interest rates, which are more influenced by Federal Reserve policies, inflation, and economic growth. Thus, an increase in national debt does not necessarily lead to higher interest rates or inflation.

Political Perspective and the Future

The debt ceiling, suspended until January 2025, will once again be a subject of heated debates in Congress. In 2025, tax cuts introduced in 2017 are also set to expire, which could significantly increase the deficit if they are not extended or offset by other measures.

Discretionary spending, accounting for only 28% of the federal budget, offers limited opportunities for deficit reduction, especially considering the significant portion allocated to defense. Reducing discretionary spending or increasing taxes will be central topics in political debates in the coming years.

Conclusion

Despite the significant rise in the deficit and national debt following the pandemic, current economic and financial mechanisms ensure market stability. High demand for Treasuries and the role of the U.S. dollar as the world’s reserve currency support financial stability. However, the debt burden remains a significant challenge requiring careful management and political decisions in the future. Investors should not drastically alter their long-term plans due to the debt crisis, but vigilance and readiness for changes in the economic situation remain important.

Therefore, discussions and measures to manage the deficit and debt will become key issues for policymakers and economists in the coming years, as well as important factors in assessing the sustainability of the U.S. economy.