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  • Writer's pictureJennifer Light

Reducing Federal Debt: A Necessity

In a world where our country has a large and still continuously growing amount of national debt, coupled with dips in our economy, we need to prioritize one or the other in order to save us from economic ruin. The question is, which?


However, the solution is clear. The US should clearly prioritize reducing the national debt, instead of prioritizing promoting economic growth! Read below to find out why.


Irreparable Damage to our Future

If we do not prioritize the federal debt, then the normal lives of citizens are threatened.


According to statistics from the CBO in The Deficit Reductions Necessary to Meet Various Targets for Federal Debt, the average income for a 4-person family could be reduced by as much as $16,000, on average, by 2048 as a result of rising federal debt. That amount would represent a 4.4 percent loss of income, compared to incomes if the debt is stabilized. However, that percentage would be the largest since 1946 and well more than twice the average over the past five decades.


Because federal borrowing reduces total saving in the economy over time, the nation’s capital stock would ultimately be smaller, and productivity and total wages would be lower. Lawmakers would have less flexibility to use tax and spending policies to respond to unexpected challenges.

Moreover, deficits have other perverse effects. As our debt grows, we will soon pay one-quarter of our taxes on interest on that debt. The more we spend on entitlements and debt services, the less there is to spend on investments in the future. This means that if we do not prioritize the federal debt, it will have a lasting impact on the future of the country.


Large Debt Slows Economic Growth


The US government is currently stuck in a staggering 27 trillion dollars worth of debt, according to the US Debt Clock.


If we chose to not prioritize the debt, that could lead to the debt-to-GDP ratio increasing. The effect of this is that debt holders are more likely to demand larger interest payments, as the credibility of the US drops. The likelihood of a fiscal crisis in the United States would increase, and there would be a greater risk that investors would become unwilling to finance the government’s borrowing unless they were compensated with very high-interest rates; if that happened, interest rates on federal debt would rise suddenly and sharply.


Economic growth, especially increasing per capita income, depends on the proper functioning of prices to signal and markets to respond, but it also depends fundamentally on increasing the amount and quality of productive capital available to the workforce. The amount of capital employed in the economy needs to increase at least to keep pace with the growth in the labor force to maintain current living standards and must grow even faster—to increase the amount of capital per worker—to raise worker productivity and thus wages and salaries.


According to Romnia Boccia, “Government deficit spending and its associated debt subtracts from the amount of private savings available for private investment, leading to slower economic growth. Unlike what staunch believers of government spending for economic stimulus claim, government stimulus spending does the opposite of growing the economy. Less economic growth caused by high government spending and debt results in fewer available jobs, lower wages and salaries, and fewer opportunities for career advancement.”


Even the current federal spending indicates that there may be high-interest payments on the debt in the near future. Current U.S. government spending is $4.407 trillion. That's the federal budget for the fiscal year 2019 (October 1, 2018, to September 30, 2019). It's 21 percent of the gross domestic product. Before the recession, the government kept federal spending below 20 percent of GDP, so it didn’t grow faster than the GDP. On average, economic growth was 2–3 percent per year. During the recession, spending grew to a record 24.3 percent of GDP in FY 2012. The government spent more on economic stimulus and at the same time, growth slowed.


Interest


In FY 2020, interest payments on the national debt will be $378 billion, which is enough to pay for over 10 Justice Departments! Unfortunately, it’s also one of the fastest-growing expenses the US currently has, projected to skyrocket past $761 billion dollars in 2028, which will surpass Medicare and become the second biggest budget item.


It's not a mandatory program, but it must be paid to avoid a US debt default. “Federal spending on interest payments on that debt would increase substantially, especially because interest rates are projected to rise over the next few years. As its interest payments increase, more federal revenues must be directed toward debt repayment, leaving less money for other economically stimulating activities, Primo says. "Once government debt reaches a certain size, it really drags on long-term [economic] growth," he says. It can also drag on the creditworthiness of the U.S. government.



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