Since the end of the Great Recession, experts warned policymakers that excessive deficits and low interest rates could make it difficult for the government to address the next economic crisis.
The coronavirus pandemic is proving them right, and pointing to a precarious road ahead for the nation’s finances.
The deficit for the first five months of the fiscal year already stands at $625 billion, well ahead of last year’s pace, when the deficit stood at $544 billion from October through February.
Now the nation faces months of slower economic growth, with likely lower tax revenue down the road. And Congress and the Trump administration are contemplating big spending packages to get the country through a crisis that promises to threaten the economy.
“In general, when your debt and deficit is higher, all equal you have less fiscal space for more needed borrowing, and that’s true both politically and economically,” said Marc Goldwein, the head of policy for the Committee for a Responsible Federal Budget, a fiscal watchdog group.
“Politicians may not want to add more debt, and markets may not want to buy your bonds,” he said.
A Thursday report from the Government Accountability Office found that already, the nation is on an “unsustainable” fiscal path. The interest paid on the debt already accounts for more than 2 percent of GDP and is the fastest-growing spending category. Without a change, the country could spend more to service the debt than on defense in a decade, and more than Medicare in 21 years.
More spending is on the way given the coronavirus crisis.
On Friday, President Trump declared a national emergency that would make $50 billion available to state and local governments.
The House was preparing legislation to stanch the economic bleeding caused by the pandemic, allowing for two weeks of paid sick and family leave, expanding unemployment insurance, shoring up nutritional assistance, and providing free coronavirus testing to the uninsured.
The bill has no cost estimate, but could cost north of $100 billion.
Speaker Nancy Pelosi (D-Calif.) said the House would next turn its attention to another package to provide broader economic stimulus. Sen. Marco Rubio (R-Fla.) said a stimulus package would likely need to cost some $300 billion.
Politicians may become wary of ever-rising price tags as the crisis continues, something that happened during the financial crisis of 2008 and 2009 after Congress approved legislation to help banks and other financial institutions and a stimulus package to bolster the economy.
That led to the rise of the Tea Party and contributed to the GOP’s takeover of the House.
Some argue the backlash against spending during a time of need was misguided, muffling the federal response and slowing the recovery. Either way, it changed politics.
“If the last crisis is instructive, we had the crisis in 2008 and people got very anxious about it in 2010. It’s possible that happens again, and once we get through the emergency, it’s possible the sticker shock will animate people,” Goldwein said.
Lawmakers in both parties have largely ignored rising deficits in recent years, something that would have been hard to believe with Obama and former Speaker John Boehner (R-Ohio) were seeking to negotiate a grand bargain on the deficit in 2011.
Today, the federal government is already sitting on a massive pile of debt and $1 trillion deficits.
Deficits were much smaller before the Great Recession.
The deficit in 2007, before the financial crisis hit, was $162 billion. That rose to $455 billion in 2008 and $1.4 trillion in 2009 as the government unleashed the massive stimulus package and moved to shore up the financial system and auto industry.
The low deficit meant there was more room to borrow, and the potential for a big impact.
“From an economic perspective I wouldn’t recommend holding our fire because our deficits are too high, but if we don’t alter our path, we will have to make that decision in a future crisis,” said Goldwein.
Even though the deficit dropped back down significantly by the time President Trump was elected, a combination of tax cuts and spending increases have caused it to mushroom once again.
“Most economists would agree that when things are good, you save for the future. It’s true for households, and it’s true for governments as well,” said Beth Ann Bovino, U.S. Chief Economist at S&P Global.
Without action, the country may find itself with a massive pile of debt dragging on the economy, even after the pandemic has long disappeared and vaccine is readily available.
“What happens is, if a government has a large amount of debt it means higher interest rates down the road, which makes it tougher for businesses,” Bovino said.
When the next crisis hits, Goldwein notes, the markets may no longer be able to stomach the debt.
“While I can look at this time and say we still have the fiscal space, I can’t say that about the next time or the time after that,” he said.