Federal Borrowing Soars as Deficit Fear Fades

6355318323_4c41d3ef76_b.jpg

Kate Davidson reports:

WASHINGTON—Borrowing by the federal government is set to top $1 trillion for the second year in a row as higher spending outpaces revenue growth and concern about budget deficits wanes in Washington and on Wall Street.

The Treasury Department said Monday it expects to issue $814 billion in net marketable debt in the second half of this calendar year, bringing total debt issuance to $1.23 trillion in 2019. That would represent a slight decline from borrowing in 2018, when the Treasury issued $1.34 trillion in debt—more than twice as much as the $546 billion it issued in 2017.

The budget gap for the fiscal year that ends Sept. 30 is on course to exceed $1 trillion, following the 2017 tax cuts that constrained federal revenue and a previous two-year budget deal that raised spending nearly $300 billion above spending caps Congress enacted in 2011.

The new budget agreement congressional leaders announced last week effectively pushed the issue of government spending off until after the 2020 election.

Concerns about rising deficits and debt have been absent from the presidential campaign trail, in contrast to previous election cycles.

The tea party rose to prominence amid a budget austerity drive that consumed Washington in the early part of the decade, leading to the 2011 deal in Congress to impose spending caps. Worries about rising borrowing costs in the early 1990s led to sweeping bipartisan budget deals during the George H.W. Bush and Clinton administrations, putting the budget in the black for the first time since 1969.

But political support for taming deficits faded in recent years, with Republicans supporting higher deficits in exchange for tax cuts and Democrats pushing for more spending on domestic programs.

The current bipartisan budget agreement, set for approval by the Senate this week, would boost federal outlays and suspend the government’s borrowing limit for two years, adding further to annual deficits into the future. It would lift spending $44 billion above fiscal year 2019 levels, or 3.5%, not including emergency war funding or one-time funding for the 2020 census.

Without a new deal, automatic spending cuts would have reduced discretionary spending—the part of the budget Congress can adjust each year—by 10% in 2020, weighing on economic growth.

The agreement removes a key source of economic uncertainty heading into the presidential election year, though economists said the modest spending lift is unlikely to translate into higher growth.

The deficit as a share of the economy is set to more than double over the coming decades, due in part to higher spending on Social Security and Medicare.

“It is difficult to see what would bring the deficit below $1 trillion in the absence of a very large turnaround in fiscal policy,” said Brian Riedl, a senior fellow at the Manhattan Institute, a right-leaning think tank. “We can’t count on an economic recovery to save us like it did last time we had trillion-dollar deficits.”

Low borrowing costs, meanwhile, suggest that markets remain unfazed by all the red ink. Government debt has soared since the financial crisis, but 10-year Treasury yields have fallen to near 2% from more than 5% in 2006, holding down government interest payments. 

At the same time, mainstream economists are increasingly questioning whether larger federal debt and deficits might be tolerable if put toward programs that would bolster long-term economic growth.

The Congressional Budget Office estimated last week the budget deal would add $265 billion to federal deficits over the next decade, though projected deficits could be as high as $1.7 trillion during that time if spending continues on the same trajectory.

Deficits usually decline during economic expansions such as the current record-long one, as low unemployment and rising paychecks push up federal tax revenue, and automatic spending on safety-net programs declines.

Deficits, after falling in the expansion’s first six years as a share of the economy, are rising again. 

“Austerity is on no one’s political agenda at present, and even though this is the time in the business cycle where you really ought to be cutting back on red ink, there’s simply no appetite for it,” said Louis Crandall, an economist at Wrightson ICAP.

The U.S. economy grew at a seasonally adjusted annual rate of 2.1% in the second quarter, the Commerce Department said Friday, a slowdown from 3.1% in the first quarter but still a solid clip 10 years into the economic expansion.

Employers added 224,000 jobs in June, and the jobless rate continued to hover near a 50-year low at 3.7%, the Labor Department said earlier this month.

The estimates released Monday by the Treasury suggest the government borrowing surge will continue through the end of the calendar year. 

The department’s latest borrowing estimate is up significantly since its projection in April, when the government was constrained by the debt ceiling, which took effect March 2 after a previous one-year suspension. The agency has been relying on so-called “extraordinary measures” since then to keep paying the government’s bills on time, but has been unable to tap bond markets to raise new cash.

The deal in Congress announced last week would suspend the debt limit for two years—until July 31, 2021—enabling the government to begin borrowing again.

The Treasury said it now expects to end the third quarter with $350 billion in cash, compared with the $85 billion it estimated in April, before the deal to suspend the debt ceiling was announced. By the end of May, Treasury Secretary Steven Mnuchin told lawmakers that the government may run out of cash by early September, a warning that accelerated negotiations over the deal.

The House voted last week to approve the agreement, which the Senate is expected to pass this week before leaving for its August recess. President Trump praised the pact as a positive for the military and veterans and urged Republicans to support it.

Fiscal conservatives, however, have warned the agreement will enshrine trillion-dollar deficits.

The Treasury said last month the U.S. budget gap widened 23% in the first nine months of the fiscal year, as higher federal spending outpaced rising tax receipts. Higher spending on the military and interest on the debt drove federal outlays up 7%, to $3.3 trillion as of June 30, while tax receipts rose 3%, to $2.6 trillion.

The Treasury will release new details on its financing plans Wednesday.

Via wsj.com