Remember the budget deficit? U.S. politicians once loudly and frequently decried all the red ink. The complaints faded as the country’s creditors showed no signs that they were worried about the government’s ability to pay its bills and the shortfall melted like ice cream on a summer’s day. The deficit shrank as a share of the economy for six straight years, narrowing to 2.5 percent of gross domestic product in the fiscal year that ended in September 2015. But the gap started widening again, to 3.2 percent of GDP in fiscal 2016 and 3.5 percent in 2017. Congressional Republicans, members of a party once known for fights against too much government spending, backed tax cuts in late 2017 that will add to the deficit. And they’re looking to spend more this year. Get ready to hear a lot about Washington living beyond its means.
On Feb. 9, after months of using short-term budget measures to keep the government running, the Republican-controlled Congress passed a two-year budget deal that would raise spending by almost $300 billion. This followed a rewrite of the tax code in December that’s estimated to reduce federal revenue by almost $1.5 trillion over the coming decade, before accounting for any economic growth that might result. Then the projections included in the 2019 fiscal year budget proposed by President Donald Trump on Feb. 12 broke from a longstanding Republican goal of balancing the budget in 10 years. Not all Republicans are happy with their party’s turnabout on deficits. Members of the House Freedom Caucus, which champions limited government and is against big spending, opposed February’s budget agreement and its additional spending. Some fiscal conservatives are warily watching the bottom line: In October, the U.S. Treasury Department reported that the budget deficit for the 2017 fiscal year that had just ended was $665.7 billion, up from $585.6 billion the year before.
Deficit decriers — including President Ronald Reagan — often noted that no business would survive by running its finances in the same way as the government. Yet the historical reality is that the government doesn’t often balance its books. The U.S. has run surpluses in only 12 of the last 77 years. Deficits surged through World War II before peacetime brought three years of surpluses from 1947 to 1949. The prosperity during the years when Bill Clinton was in the White House led to a $128 billion surplus in fiscal 2001. A year later this turned into a $157 billion deficit following a brief recession and the upheavals of the Sept. 11 terror attacks. The far bigger recession triggered by the global financial meltdown of 2008 meant that President Barack Obama entered office in the midst of a four-year run of trillion-dollar deficits that ended in 2012. Though the process wasn’t pretty, Obama and the Republican-controlled Congress brought the deficit down from a high of $1.4 trillion in fiscal 2009. Part of the effort was the 2011 Budget Control Act, which mandated $2 trillion in automatic spending reductions from 2012 to 2021. But the automatic cuts, known in Washington as the sequester, were only triggered in 2013; Congress has voted to roll back them back in subsequent years. The deficit started climbing again after Congress revived some tax breaks in 2015.
The long-term deficit outlook is troubling. Around 2024, when the last of the 76 million baby boomers approach retirement age, there will be heavy demands on Social Security, the Congressional Budget Office says. There are economists who say the pain could arrive much sooner. Inflation is showing signs of returning; this will swell the government’s annual interest payments. That threat is cited by politicians pushing for a smaller government and anti-deficit think tanks like the Peter G. Peterson Foundation and Fix the Debt. And some investors said one reason for the February stock market selloff was the fact that Congress is now “willing to spend like crazy.” If anti-deficit forces in Congress aren’t powerful enough to rein in spending, another group could take aim: bond vigilantes. Investors unhappy at the thought of accelerating inflation could sharply cut their purchases of Treasury debt. That’s what happened in 1993, when bond buyers effectively pressured President Bill Clinton to abandon his campaign promise of a tax cut for the middle class.
David J. Lynch contributed to the original version of this article.
First published Dec.
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