US national debt is heading for historic highs – whoever wins election

Here in the UK, politicians are fixated with the level of the national debt.
They fret about the fact that it is now knocking on for 100% of UK gross domestic product (GDP). They incorporate it into their fiscal rules, compelling them to get it falling (even if they rarely succeed in practice).

So you might be surprised to learn that while Britain’s national debt is projected to fall in the coming years, the equivalent figure in the US is projected to balloon to completely unprecedented levels.
In fact, while Britain and America’s state debt levels have moved in near lockstep with each other in recent decades (as a percentage of GDP, both were in the mid-30s pre-financial crisis, in the 1970s and 1980s afterwards, then approaching 100% after COVID), they are about to diverge dramatically.
So, at least, suggest the latest projections from the Congressional Budget Office and Britain’s Office for Budget Responsibility (OBR). They show that while both UK and US net debt are just shy of 100% this year, America’s will rise to 125% by the middle of the next decade, while Britain’s will fall to 91%.

Now of course, these are just projections, based on the assumption that each country follows the current plans laid down by their respective administrations. Those plans could well change. But even so – the gap would amount to the biggest divergence in post-war history.
The reasons for it are many: in part, the US is raising less in taxes, thanks in part to a series of tax cuts and exemptions which began under Donald Trump but continued, for some recipients, under Joe Biden.

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In part it’s because it’s spending more, both on discretionary measures like the Inflation Reduction Act (a series of subsidies for green tech firms) and non-discretionary schemes like Medicare.

Either way, the US is slated to borrow more in the coming years than it has done in any comparable period in recent memory. And the upshot of that is a seemingly perpetual increase in the federal debt, up to that 125% of GDP record level.

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Which raises the question: what are the candidates in this election planning to do about it? The short answer is: not much.
Indeed, according to the latest analysis from the non-partisan Committee for a Responsible Federal Budget, based on the promises made by Kamala Harris and Donald Trump, the gap will only widen – whichever party wins the election.
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It found that the Ms Harris campaign’s plans, which involve considerably more spending, imply the federal debt rising to a record 133% of GDP.
Perhaps that’s unsurprising, but the real shock of the analysis is that it found Mr Trump’s plans imply an even steeper upward trajectory, as he slashes taxes for a range of households and businesses, and continues some of the existing spending plans. While the Republicans are traditionally seen as the party of fiscal prudence, a second Trump administration would send the federal debt heading towards 142% of GDP.

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All of these figures would be record numbers. And for some economists that raises an important question: at what point do investors in UK government debt – and the dollar more widely – balk at these spending and borrowing plans?
Since the US dollar remains the world’s reserve currency, Washington is often said to enjoy an “exorbitant privilege”, allowing the government to avoid the constraints of many other nations. But with the federal debt heading towards these unprecedented levels – regardless of which candidate wins – the country’s economic story is heading into unfamiliar territory.

Source : Sky News