The federal budget deficit is expected to balloon to $1 trillion by the 2020 fiscal year, according to a new forecast from the Congressional Budget Office. The good news, says Alan Clayton-Matthews, an associate professor of economics and public policy at Northeastern University, is that unlike a household debt, the growing national debt “never has to be paid off.” The bad news? The federal government is running out of tools it can deploy to bolster the economy when it dips into a recession.
The budget deficit—the gap between what the government spends and what it takes in through taxes and other sources of revenue—is expected to reach $960 billion for this fiscal year, which ends on Sept. 30. The deficit will widen to $1 trillion by fiscal year 2020, its growth attributed in part to the Tax Cuts and Jobs Act of 2017, Clayton-Matthews says.
Among other changes, the law reduces tax rates for business and individuals, meaning the federal government isn’t bringing in as much tax revenue as it used to.
“It’s a sizable chunk of change,” says Clayton-Matthews, who is the senior research assistant at the Dukakis Center for Urban and Regional Policy and director of the doctoral program in Law and Public Policy at Northeastern. “When the government lowers its taxes, it’s going to run a higher deficit.”
In some ways, the federal budget can be compared to a household budget. If you’re spending more money than you’re bringing in, your budget is operating at a deficit. As the years go on and you’re still spending more than you’re making, you accumulate debt.
Just like a household operating at a deficit and accumulating debt, the United States has been operating at a (growing) deficit and has accumulated a national debt. The Congressional Budget Office predicts that by 2029, the federal debt held by the public will be the highest it’s ever been since the period just following World War II.
Here’s where the comparison between household debt and the national debt falls apart, though. If you or I accumulate debt, we have to pay it off by the time we retire, so we have sources of income when we’re no longer working. The national debt doesn’t have to be paid off in the same way, Clayton-Matthews says.
“A nation never has to pay off its debt because the federal government is never going to retire,” Clayton-Matthews says. As long as a country’s economy is large enough that its government can afford to pay off the yearly interest on its debt, the country can afford to maintain a large debt, he says.
So, neither the growing budget deficit nor the country’s national debt “are huge problems right now,” Clayton-Matthews says.
“But they will become a problem when our next recession hits,” he says.
The federal government has typically increased spending on infrastructure projects and cut taxes when the economy takes a downturn—efforts to take the pressure off individual citizens, create jobs, and jumpstart the economy, Clayton-Matthews says. When the economy takes a dive, the “federal government operates at a huge deficit,” he says.
Indeed, federal budget deficits during the Great Recession ranged from $1.4 trillion to $1.1 trillion.
The problem is that the U.S. economy is not currently in a recession, and the federal government is still running a large deficit, Clayton-Matthews says.
“The federal government would like to be in a position to be able to run a large deficit when the next recession comes, but that’s very difficult to do if you’re already in a large deficit,” he says.
When the next economic recession hits—a prediction that’s “not a matter of ‘if,’ but ‘when,’” Clayton-Matthews says—the typical tools that the federal government can deploy to pull the country out of it could widen the budget deficit and deepen national debt so much that the U.S. would no longer be able to afford the interest payments on its debt.
“That debt spiral is where this gets dangerous,” he says.
Still, Clayton-Matthews emphasizes how difficult it is to predict how an economy will fare in the future because of how many factors contribute to it. And, for now, “just because we’re incurring a deficit doesn’t spell disaster for the economy.”