A report submitted to Congress on Thursday (June 21) by the U.S. Office of Government Accountability (GAO) warns that action is needed on the nation’s growing federal deficit, which grew to $666 billion in 2017 and is projected to surpass $1 trillion by 2020.
According to the GAO’s 2017 financial report, the federal deficit in fiscal year 2017 increased by 13.5% from $587 billion in fiscal year 2016 and $439 billion in fiscal year 2015. Federal receipts increased by $48 billion, but that was outweighed by a $127 billion increase in spending, driven by Social Security, Medicare and Medicaid, and interest on debt held by the public. (Link here for a PDF of the GAO report.)
Debt held by the public increased from $14.2 trillion at the end of fiscal year 2016 to $14.7 trillion at the end of fiscal year 2017. Due to an increase in gross domestic product (GDP), it fell slightly as a share of GDP, from 77% at the end of fiscal year 2016 to 76% at the end of fiscal year 2017. This compares to an average of 45% of GDP over the period since 1946.
The GAO is an independent, nonpartisan agency, often called “the congressional watchdog,” that works for Congress and investigates how the federal government spends taxpayer dollars. Based on the new data, the GAO states that in addition to near-term financing decisions, the Trump administration and Congress need to put the federal government on a more sustainable long-term path.
“The Congress and administration face serious economic, security and social challenges that will require difficult policy choices in the near term about the level of federal spending and investments as well as ways to obtain needed resources,” the report states. “At the same time, the federal government is highly leveraged in debt by historical norms.”
Absent any policy changes, the federal government’s fiscal path is “unsustainable,” the GAO report concludes, and the nation’s debt-to-GDP ratio would surpass its historical high of 106% within 14 to 22 years.
The 60-page GAO report follows an earlier review of President Donald Trump’s 2019 budget by the nonpartisan Congressional Budget Office that estimated the federal deficit would jump over the $1 trillion mark in two years, even with strong economic growth.
In CBO’s baseline projections, which incorporate the assumption that laws governing taxes and spending generally remain unchanged, the federal budget deficit grows substantially over the next few years. Down the road, between 2023 and 2028, the deficit would even out in relation to the size of the economy, though at an elevated level by historical standards.
As a result, the CBO report notes, federal debt is projected to be on a steadily rising trajectory throughout the coming decade. Debt held by the public, which has doubled in the past 10 years as a percentage of GDP, is projected to approach 100% of GDP by 2028, the CBO projects.
“That amount is far greater than the debt in any year since just after World War II. Moreover, if lawmakers changed current law to maintain certain current policies—preventing a significant increase in individual income taxes in 2026 and drops in funding for defense and nondefense discretionary programs in 2020, for example—the result would be even larger increases in debt,” the CBO report states.
DEBT TO REACH $29 TRILLION
In fiscal terms, the U.S. deficit is the annual difference between government spending and government revenue. Every year, the government takes in revenue in the form of taxes and other income, and spends money on various programs, such as national defense, Medicaid and Medicare, Social Security, and healthcare.
On the other hand, the national debt, also known as the public debt, is the result of the federal government borrowing money to cover years and years of budget deficits. The GAO report highlights the fact the debt limit is not a control on debt but rather an after-the-fact measure that restricts the Department of the Treasury’s authority to borrow to finance the decisions already enacted by Congress and the President.
In November 2017, Congress approved President Trump’s overhaul of the U.S. tax code for the first time in more than 30 years with the passage of the omnibus $1.5 trillion Tax Cut and Jobs Act of 2017. At the time, U.S. Treasury Secretary Steve Mnuchin said the tax cut bill would add $1.8 trillion to U.S. budget coffers over the next decade at 3% GDP growth, easily offsetting any projected debt growth and any fiscal challenges.
However, the CBO countered that the effects of the legislation would raise deficits by an estimated $1.5 trillion over the period from 2018 to 2027. In April, the CBO released its new 10-year budget and economic outlook, which projects federal deficits to rise to nearly 100% of GDP by 2018. That report, which was delayed to give the CBO office more time to analyze the tax cut bill and other legislation, projects a deficit of $804 billion, with shortfalls generally increasing through until the debt held by the public jumps to nearly $29 trillion by 2028.
GAO officials said they have discussed alternative approaches to managing debt with several members of Congress.
“Experts have also suggested replacing the debt limit with a fiscal rule imposed on spending and revenue decisions,” the report states. “Congress could consider this as part of a broader plan to put the government on a more sustainable fiscal path.”
Of further concern, the GAO report notes, is the fact that none of the long-term projections include certain other fiscal risks that could affect the federal government’s financial condition in the future.
“These include risks stemming from unforeseen events to which the public expects a federal fiscal response, such as wars or weather-related, economic, or financial challenges such as sustaining the multiemployer pension plans insured by the Pension Benefit Guaranty Corporation,” the report concludes. “A more complete understanding of fiscal risks can help policymakers anticipate changes in future spending and can enhance oversight of federal resources.”