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Budget deficits are no problem for a state as long as the trend GDP growth (and thus trend revenue growth) is stronger than the growth of public debt. Suppose there's a country with a GDP of 1,000 and a debt of 1,000. This country may have an annual budget deficit of 50 (5 %GDP). This is really bad with economic stagnation, but with a (hypothetical) growth trend of 5%GDP p.a. (50 per year) the deficit would actually be sustainable unless interest rates rise and grow the deficit.*
Let's look at the development of public debt in the U.S.:
A budget deficit projection of around 5 %GDP p.a. seems optimistic to me (there's good reason to expect bigger deficits), more about this later.
Now what does the GDP growth trend in the U.S. look like?
That looks strongly as if something close to 3% p.a. GDP growth is a reasonable expectation.
Let's pay attention to why the deficit developed as it did.
- The long term trend was that Republicans in control of both Congress and White House did cut taxes (thus revenue, fairytales about tax cuts being budget neutral don't fly in continental Europe) and increased spending (especially military spending). The Republicans basically have two policies for economic growth; they claim that their tax cuts bring growth (not for real!), but what really brings growth is the sugar high of deficit spending.
- Republicans do on the other hand try to starve the executive branch off funds whenever it's being controlled by a Democrat in the White House. Then they suddenly claim that they're extremely concerned about the lack of sustainability of deficits and social security and run scare campaigns to build up political support for budget cuts. They usually spare the military from cuts, though. These periods of Republicans controlling the purse and a Democrat controlling the spenders (the executive branch) show an improvement of the budget balance. The improvement even reached a surplus late in the Clinton administration, but the improvements (reduction of deficits in %GDP) are visible during the Obama and Biden administrations as well.
- Democrats in control of Congress and Republicans in control of the White House tends to play out as Republican Presidents largely getting the budget size they want.
- Another mode is Democrats in control of both legislative and executive branches. This leads to deficits, but in normal times these are not as extreme ones as when Republicans are in full control.
- The fifth mode is disaster mode; 2008 Great Recession, 2020 Covid. This produces huge spikes of deficit spending, seemingly regardless of the party in power.
The Republicans are now in control and about to establish a dictatorship on a spectrum from one party dictatorship to overt Fascism. The remaining lifetime and effectiveness of the lying moron decides what it becomes. Their majorities in Congress are small, but they are a thing, and it's clear that they are by now "Republicans" in name only. Actions speak louder than words.
A true republic would likely continue the dysfunctional up and down of the past 45 years (hopefully without a 3rd giant disaster). To project about 5 %GDP budget deficits for the next ten years as in the 1st graphic makes sense under the assumption of a true republic.
A "Republicans"-controlled U.S. on the other hand would likely go all-in on the "Republican" orthodoxy of cutting taxes for the rich (fig leaves for the middle class) and undisciplined deficit spending, including growing military spending. To project a %GDP budget deficit development from 5 %GDP p.a. towards about 8 %GDP p.a. by 2030 seems most plausible for this scenario to me. An issue is that they may enter a war to distract from their domestic policy issues.
So the growth of the public debt till 2030 would likely be in the 27...35 %GDP range. It's at about 123 % GDP by now, so the path to 2030 would be around 150...158 %GDP.
Now let's look at economic growth. Economic growth can be explained by increased inputs (more hours worked, influx of foreign capital pushing investment, greater exploitation of natural resources) and technological progress. The Americans already work many hours per week with few vacation days and holidays per year, so there's little room for increase. Anti-immigration policies will reduce the hours worked (though an increase of pressure on unemployed people may partially compensate for this). The growth of working age population is projected to be very weak. Finally, the misogynistic leanings and traditionalism of the Republicans do not promise an increase of the percentage of females in jobs unless there#s workforce mobilisation for a war economy.
The Biden administration was already quite eager to exploit natural resources (example crude oil) contrary to some perceptions, so there's little potential for improvement in the next couple years (and IMO also in the 30's).
Finally, technological progress. The rate of it has been shrinking since the 70's. You may look up articles on whether technological progress is slowing yourself, I didn't find a really great one. The phenomenon has been known for a while, and it's not an American one - technological progress has slowed in all rich Western countries. It's the same story in Germany, UK and so on - sometimes even worse because the U.S. recovered particularly well from the Great Recession due to huge deficit spending fiscal stimulus efforts early in the Obama administration.
Long story short; there's no reason to expect a trend growth better than what we've seen in the 2nd graphic. about 3% p.a. GDP growth is a reasonable expectation. Politicians promise much, but they never deliver a clear growth trend improvement in an already well-developed economy.
So there's likely going to be 5...8 %GDP annual deficits and 2...4 % GDP growth p.a. on average. The former because of policy and the latter because of fundamentals that politicians can do little about (unless they deport too many people, as then both deficits and growth would become worse).
Where is the breaking point? I wrote about 150...158 %GDP public debt by 2030. Japan has about 250 %GDP, Singapore about 170 %GDP, Italy about 135 %GDP public debt. There's apparently no accurate breaking point. The U.S. might keep going forward on its unsustainable path (the trade balance is terrible as well) for quite some time. On the other hand, it might collapse anytime as well. To alienate Europeans, Australians, Canadians, Japanese, South Koreans and Taiwanese may create a tipping point in one way or another, for example when confidence in the USD as reserve currency takes a big hit. The cardhouse may collapse if and when the USD loses much of its reserve currency status. There's no reason why all those alienated countries should do the U.S. the favour of keeping the USD as reserve currency. No reserve currency status for the USD means the U.S. could not sustain its trade balance deficits. This means its consumption AND capital investment would collapse. An overtly Fascist U.S. may find it difficult to buy certain capital investmnet goods such as TSMC machines anyway, and right now it's already restricted in terms of rare earths imports. The lying moron's disrespect for Federal Reserve Bank's independent operation as shown in 2017-2020 might create such a tipping point as well. A Sino-American War is a real possibility as well.
The truly scary thing about this is not the possibility of a tipping point or the acceleration of the downhill race. The truly scary thing is the seeming inevitability. The fundamentals cannot really change for the better by much and the political system doesn't appear to be able to improve, either. So the fiscal policy won't improve fundamentally. A long-term dictatorship deserves a projection of a worsening fiscal policy until some kind of disastrous crash occurs that forces a change of a fiscal policy pattern that held for 45 years.
I understand that Americans have been told a plethora of fairy tales and scaremongering stories about this topic. An American who is not an economist would be well-served to ignore those and simply think of the economic growth trend as weakening and being near-impossible to improve, while the budget deficit is essentially about overspending on the military and undertaxing the rich (including the foreign rich; 40% of American stocks are owned by foreigners, so tax cuts on American corporations are in large part tax cuts for rich foreigners). The public debt is not really about escalating healthcare costs (which is stagnating at about 17.x %GDP since the "Affordable Care Act" a.k.a. "Obamacare" went into force) and social security isn't a big driver, either. Example: Social Security had 1.22 T $ revenue and 1.24 T $ expenditures in 2022 - its deficit was tiny in comparison to the federal budget deficit around that time (1.4 T $ in FY 2022).
By the way; the Euro area is not that unsustainable. The public debt stands at about 90% for that area as a whole. The only large Euro area country that's worsening its public debt situation is France. The overall %GDP debt increase in the Euro area was much smaller than the American one and the %GDP public debt level is below 90 %GDP instead of above 120 %GDP. The Euro area has no chronic trade balance deficit, though that may change once the EUR gains use as reserve currency. Last but not least; increases of military spending are unlikely to change this terribly much, as they would act as fiscal stimulus (few Euro zone countries are at economic capacity limit). It's still wasteful to overspend on the military, but increases big enough to propel an European-style about 0.5 %GDP aggregate budgets deficit to an American-style 5 %GDP p.a. budget deficit are plain unrealistic short of WW3.
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P.S.: This was originally written 21 Feb 25, but not published right away and slightly edited before publication (addition of the reserve currency issue for tipping points mostly).
*: p.a. = per annum = in a year
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