Americans haven’t been spooked by government debt lately, but fate seems to have provided a Halloween-themed wakeup call: the Treasury Department announced Friday that the U.S. government ran a budget deficit of $666 billion dollars in the 2017 fiscal year, which ended September 30.
That devilish number is an $80 billion increase from fiscal 2016. Though federal revenues are at an all-time high, expenditures grew even faster, producing a deficit equal to 3.5% of Gross Domestic Product. This marks the second year in a row that the deficit rose as a percentage of GDP, following steady declines between 2009 and 2015.
According to the Treasury Department, the increase in expenditures was driven by entitlements such as Social Security and Medicare — as well as by the rising cost of financing outstanding debt.
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A rise in interest rates paid on the federal debt could drastically change the national conversation on government spending. Public concern about the nation’s budget deficit has waned in recent years, in part because stimulus spending following the financial crisis was deemed a necessary evil by many, but also because low interest rates have made financing the debt more affordable.
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Now that the economy has been stabilized, conventional economic wisdom says it’s time to shrink the deficit. But current law would continue growing the national debt, which the Congressional Budget Office recently projected could reach nearly 90% of GDP by 2027. While that is a high debt level by global standards, it could still be sustainable for an economy as robust as America’s. Japan’s national debt, by comparison, is more than 200% of GDP, and that nation still receives solid ratings from credit agencies.
But the CBO’s projections do not account for tax reforms currently being planned by President Donald Trump and the Republican-controlled legislature. Trump’s history of embracing debt as a business tool seems to have extended into his views on the federal budget, and he has promised huge tax cuts intended to chase extremely ambitious GDP growth targets.
Trump’s Treasury Secretary, Steven Mnuchin, has said economic growth spurred by lower tax rates would offset losses to federal revenue and actually reduce the debt. Most economists don’t buy that resurrection of “supply side” or “trickle down” budget logic, with the majority of 26 surveyed by Bloomberg saying a version of the tax plan floated last month would increase both annual deficits and the total national debt even more dramatically.