America’s debt
payments increase significantly from $494 billion in 2023 to a projected $1.4 trillion by 2033, 5 partly due to the increased total or ‘notional’ value of the debt and because interest rates have been significantly rising this past year, as the American Federal Reserve tries to combat the high inflation. One reason why governments, such as in the US, have been willing to borrow more is that they have become so used to the years between 2009 and 2016 where interest rates were below 0.5%, 6 and so they have become more comfortable borrowing large sums of money because of how cheap it was. The reasons why the deficits have been increasing drastically during the past few years and will likely do so in the future are: increased interest rate costs on previous debts; increasing mandatory spending on Social Security & Medicare; large government programs like the ‘Inflation Reduction Act’; but also significant tax cuts from recent years like the ‘Tax Cuts and Jobs Act’. As tax revenue is the main source of income for the US government, the budget deficit is greatly affected by changes in the tax code. The Congressional Budget Office reported that extending the ‘Tax Cuts and Jobs Act’ to 2033, would add $3.5 trillion to the deficit, 7 because the government would be missing out of billions per year from less tax. The CBO also reported that the largest driver of the deficits since 2001 have been Bush’s and Trump’s tax cuts, accounting for 57% of the increase. 8 The ever increasing debt will become a large problem for America as they will want to try and keep control of the budget deficit. To solve this they can either increase taxes or cut expenditure, which is already happening in America, for instance with a $12 billion funding cut for education or a proposed cut in Medicaid, 9 which may reduce future growth and harm the standard of living of the American people. Cutting expenditure is often more likely because increasing taxes is much more unfavourable to American citizens and the government would want to retain their votes and stay in power. Another problem with these higher rates of borrowing, and in turn higher interest rates, is that it will be much more expensive for firms to invest and borrow. This is called ‘crowding out’ , where an increase in government borrowing leads to a decrease in borrowing in the private sector. Reducing private sector investment will likely reduce their growth as they can’t expand as quickly and will lead to a slower growing economy.
The only way a government can continue to borrow money is by convincing others to actually buy their bonds and debt, and so to successfully issue the bonds and finance the economy, they need the
5 ‘The Past is Prologue: Biden’s Deficit Spending Record’, Budget Committee, last modified 7 March 2023, https://budget.house.gov/press-release/the-past-is-prologue-bidens-deficit-spending- record/#:~:text=Record%2DBreaking%20Debt&text=Under%20CBO's%20current%20projections%2C%20the,t o%20%24154%20trillion%20by%202053. 6 ‘Federal Funds Rate – 62 Year Historical Chart’, macrotrends, date accessed 28 July 2023, https://www.macrotrends.net/2015/fed-funds-rate-historical-chart. 7 ‘Extending Trump Tax Cuts Would Add $3.5 Trillion to the Deficit, According to CBO’, United States Senate Committee on the Budget, last modified 16 May 2023, https://www.budget.senate.gov/chairman/newsroom/press/extending-trump-tax-cuts-would-add-35-trillion- to-the-deficit-according-to-cbo. 8 United States Senate Committee on the Budget, ‘Extending Trump Tax Cuts Would Add $3.5 Trillion to the Deficit, According to CBO’ . 9 Katherine Knott, ‘Higher Ed Groups ‘Appalled’ at House Budget Cuts’, Inside Higher Ed, last modified 17 July 2023, https://www.insidehighered.com/news/government/student-aid-policy/2023/07/17/higher-ed-groups- appalled-republicans-planned-budget#:~:text=What's%20Cut,12%20programs%20are%20factored%20in.
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