borrow or withdraw savings for needed income.
The graph below shows the relationship between federal budget deficits and the total public (federal) debt. The blue line (left axis) indicates the budget deficits or surpluses that have occurred since 1980. The onset of consistent budget deficits for the U.S. was the decade of the 1980s. Except for a brief period between 1998 and 2001 when the U.S. was enjoying excellent economic growth and the tech boom was in its internet infancy, the United States has had budget deficits since 1980. In the late 1990s, the economy boomed, unemployment was relatively low (around 4.0%), and a budget surplus resulted. An ideal mix for reducing debt. There have been three major events since the turn of the century that have significantly increased the budget deficit and total federal debt: 1) the financial crisis of 2008, 2) the tax cuts of 2018, and 3) the COVID crisis of 2020. The red line (right axis) indicates the total public (federal) debt outstanding. Generally, the public (federal) debt outstanding reflects the accumulation of budget deficits, with subsequent budget deficits increasing the total public (federal) debt outstanding. Between 1980 and 2010, the debt rose from near $0 to approximately $10 trillion. Since 2010, the debt has approximately tripled to $30 trillion. Since 2008, two major economic downturns and the 2018 tax cut have fueled the debt increase. Federal Budget Surplus or Deficit; Total Public Debt Annual amount of Federal Budget Surplus or Deficit in Millions of Dollars (1980-2022) Source: Graph from Federal Reserve Economic Database (FRED) based on data from the U.S. Office of Management and Budget and Treasury
The financial crisis had a dramatic effect on the deficit, with the deficit increasing approximately $1.2 trillion between the onset of the crisis in 2007 and 2009. An economic recovery began in 2010 that reduced the deficit from approximately $1.4 trillion in 2009 to $442 billion by 2015, a drop of almost 70%. The budget deficit usually decreases during periods of economic growth. That, however, changed with the tax cuts of 2018, which contributed to increasing budget deficits during a period of economic growth. Between 2015 and 2019, the budget deficit doubled to over $900 billion, despite a growing economy and the unemployment rate approaching a record low 3.5%. The Congressional Budget Office estimated in 2018 that the tax cut would increase deficits by approximately $1.8 trillion over 11 years. Contrary to the budget surplus created in the late 1990s when economic growth was good with relatively low unemployment, the new tax structure in 2018 combined with the fiscal cost structure resulted in growing deficits, despite a record period for economic growth and historically low unemployment. A budget surplus, even with economic growth and record low unemployment, no longer seemed tenable. The growing deficits were greatly exacerbated by the onset of COVID, with the deficit increasing approximately $2 trillion in 2020 to $3.2 trillion. The three major events of the current century that greatly increased the deficit, the financial crisis of 2008, the tax cuts of 2018, and the COVID crisis of 2020, contributed to the rapid expansion of federal debt. What happens if the debt ceiling is not raised? The U.S. government may not have the needed funds to pay current financial obligations and current holders of government debt may not receive promised payments.
Central Wisconsin Report - Spring 2023
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