The Fiscal State of Play

Some commentators have made the argument that our nation’s fiscal challenges are not particularly large. So what is the fiscal state of play?

Certainly annual deficits have fallen since the Great Recession, from a peak of $1.4 trillion (9.8 percent of Gross Domestic Product) in 2007 to $438 billion (2.5 percent of GDP) in 2015. But they grew by 35 percent this year to nearly $600 billion (3.2 percent of GDP), and they are projected hit the $1 trillion mark in 2024, resulting in a deficit of 4.0 percent of GDP. By comparison, deficits have averaged 2.8 percent of GDP over the past 20 and 50 years.

Interest payments were 6.4 percent of the budget last fiscal year, or 1.4 percent of GDP, compared to the 20-year historical average of 8.2 percent and 1.8 percent of GDP, respectively. This was due to very low interest rates despite the high level of debt, but interest payments are projected to rise to 11.4 percent of the budget and 2.6 percent of GDP by 2026.

Perhaps the key fiscal metric of concern – debt held by the public – stands today at $14.2 trillion, or 77 percent of GDP, which is the highest it has been since just following World War II (1950). And it is projected to grow further to 86 percent of GDP by 2026 and exceed 100 percent of GDP around 2035.

The bottom line is that while deficits and especially debt are already high today, the more troubling picture is where we are heading tomorrow. That's why we need to make getting control of the medium- and long-term debt a priority. All fiscal indicators are projected to deteriorate, and the debt is on an unsustainable path growing faster than the economy. And the deterioration would be even worse under the proposals from the presidential candidates (much more so under Donald Trump’s plans).

Fiscal Indicators This Year and in 2026

  2016* 2026
Deficit (% GDP) $590 billion (3.2%) $1.2 trillion (4.6%)
Interest payments (% GDP) $248 billion (1.4%) $712 billion (2.6%)
Interest payments as % of budget 6.4% 11.4%
Debt (% GDP) $14.1 trillion (77%) $23.1 trillion (86%)
Debt under Clinton proposals (% GDP) N/A $23.3 trillion (86%)
Debt under Trump proposals (% GDP) N/A $28.4 trillion (105%)

Sources: Congressional Budget Office, CRFB calculations
*Final numbers are not available, this column uses the August 2016 projections from the Congressional Budget Office.

This is problematic because higher debt leads to slower economic growth, wages, and a lower standard of living, while fixing it can actually improve wages. The Congressional Budget Office projected that putting in a plan that would gradually reduce debt to 55 percent of GDP in 30 years would increase income per person by 5 percent.

Higher debt also increases interest spending and leaves the federal government more vulnerable to swings in interest rates. If interest rates are 1 percentage point per year higher, they lead to $1.6 trillion more in spending on interest payments over ten years.

Additionally, high debt levels mean we have less fiscal space to deal with the next economic downturn or emergency. Our recent paper "Running on Empty? Fiscal Space and the Next Recession" goes further in depth on this.

There are many economic challenges the candidates should be talking about, from economic growth to job creation and economic security. One important area where there has not been much focus is our significant fiscal challenges, and it is certainly an area where there has yet to be a satisfactory answer from the presidential candidates on how to deal with them.