The United States still grapples with managing the public debt that has been soaring over the last decade. However, the coronavirus pandemic has pushed the debt to unprecedented levels to surpass the country’s Gross Domestic Product.
Data presented by Bankr.nl indicates that between December 2019 and December 2020, the United States public debt has grown by 19.59% from $23.2 trillion to $27.74 trillion. The debt spiked sharply between March and December, recording a growth of 17.14% during the period.
Compared to the GDP, the U.S. public debt is more than 30.41%. As of January 2021, the GDP stood at $21.27 trillion.
Pandemic triggers massive government spending
The United States soaring public debt is the collateral damage of the coronavirus pandemic that has resulted in federal budget deficits. The pandemic has caused a massive economic disruption, and the government’s response contributed to the rising debt. The debt increased dramatically in April, as the federal government started spending hundreds of billions of dollars on mitigating the pandemic’s effects. The pandemic and the economic collapse led to a historic run of government borrowing in trillions of dollars for stimulus payments, unemployment insurance expansions, and loans to keep small businesses and big companies afloat.
The pandemic also slowed down the GDP. However, towards the third quarter, fueled by a possible second pandemic relief package, the economy regained its momentum. At the same time, some states also reopened following months of lockdown. However, threatened with a second Covid-19 wave, the package was not enough; hence the overall GDP remained lower than the public debt. It is worth mentioning that the U.S. government has run deficits nearly every year since the Great Depression and consistently since fiscal 2002.
The public debt usually increases as a result of government spending and decreases from tax cuts, both of which change during a fiscal year. From a historical perspective, the US public debt as a share of GDP has increased during wars and recessions and subsequently declined. The ratio of debt to GDP may decrease due to a government surplus or the growth of GDP and inflation.
The budget deficit increased sharply before 2020 with government tax cuts approved by Congress, and spending rose. However, the pandemic pushed the yearly deficit even higher. The tax cuts were necessary to offset the deficit as more people stayed at home from various shutdowns alongside work-from-home orders.
The U.S. economy is also an unusual spot because the debt is high, but interest rates are meager. The low-interest rates are keeping the economy in balance. If interest rates were to rise significantly, the financial debt would widen.
Dangers of soaring U.S. public debt
Overall, the public debt in the U.S. has been on an unsustainable course even before the pandemic. Experts had projected the debt would keep rising even post-pandemic because of the aging population, growth in per capita spending on health care, and rising interest costs.
On the flip side, the high public debt to GDP ratio poses a great risk to the U.S. economy. The debt could absorb much of investors’ money that other borrowers would have trouble raising cash at affordable rates. Additionally, if the debt continues to rise more than the GDP, there might be a depressed economic output; more interest payments flowing out of the U.S. to foreign debt holders. It will consequently increase the risk of a fiscal crisis where investors will raise interest rates and demand to fund the debt.