Texas Border Business
The US national debt recently crossed an ignoble threshold, exceeding gross domestic product (GDP) for the first time since World War II. Budget deficits are high and accelerating, escalating debt levels rapidly despite a relatively strong economy.
The fact that federal debt held by the public is now approximately 100% of GDP and projected to increase further will ultimately require an effective policy response. Interest payments are approaching $1 trillion annually and could increase substantially if red ink continues to mount.
For decades, spending has far exceeded tax collections, and the resulting deficits are expanding the debt. Certain outlays can support economic growth, including investments in education and infrastructure. Over time, however, rising debt levels work to limit policy flexibility, restrict private-sector access to capital, and put upward pressure on interest rates.
At this point, debt is growing faster than GDP; thus, without corrective action, this ratio will continue to rise. Other than something to highlight the ongoing pattern, there is nothing magic about the one-to-one ratio. It is not materially different than 0.99 or 1.01. The problem lies in the perpetual ballooning.
To address the issue, it will be necessary to reduce annual deficits. One challenge is that much of the spending is either legally or pragmatically not discretionary. Social security has accounted for 22% of outlays this year, followed by net interest (14%), health (14%), Medicare (14%), defense (13%), and income security (10%). National defense is currently elevated due to the situation in the Middle East, but it will likely remain high given geopolitical uncertainty and policy priorities.
The other side of the deficit equation (taxes) is also challenging. Excessive or inefficient tax policy can reduce economic growth, and it is certainly impossible to tax our way to prosperity. However, it is important that sufficient revenue is raised to pay for needed spending. Effective solutions will require work on both sides of the income statement.
While the 100% milestone is more symbolic than substantive, it is an unmistakable manifestation of fiscal stresses that have been building for decades. It will take a combination of responsible spending and tax policy to diminish the increase in the debt over time. It will be difficult to achieve meaningful progress without bipartisan efforts (rare these days) and a long-term view (even more rare). Some of the changes needed will be unpopular and others have their primary benefits decades into the future. A perspective beyond the next election cycle is essential.
Managing deficits and, therefore, the debt is a mammoth and thankless task, but the time has come. Kicking the can down the road will only exacerbate the situation, leaving future generations with even bigger problems and jeopardizing global financial stability. Stay safe!
________________
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com), which has served the needs of more than 3,000 clients over the past four decades.
