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US Federal Deficit Surges

| December 03, 2018

The US federal government ran a deficit of over $100 billion in the month of October. This is a 59% increase from October 2017 and puts the deficit on pace total $1 trillion for the year.

The combination of the tax cuts passed in late 2017 combined with the spending bills passed in early 2018 has caused the US national debt to increase sharply in 2018. During the same period the US economy grew 5.5% (3% adjusted for inflation) but the debt as a percentage of the size of the US economy increased 6% over the same period. So despite the pace of economic growth returning to its historical average, the deficit has continued to swell as government spending has outpaced the rate of economic growth. This means the debt will continue to increase as a percentage of economic output, which is the key metric many economists use to gauge the point where too much debt will start to weigh on economic growth.

As the Federal Reserve continues to raise interest rates, the cost of funding the debt is also increasing causing interest payments to become a larger and larger spending category. Currently, the cost of paying interest on the national debt is expected to pass defense spending to become the third largest spending category behind Social Security and Medicare.

This has created fears that government borrowing will begin to “crowd out” private borrowing. This occurs when the federal government soaks up the majority of the funds available to fund the national debt making it more difficult for private businesses, individuals, as well as state and local governments to borrow at reasonable rates.