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The federal government of the United States is well-known for its habit of spending significantly more than it earns. If this trend of overspending is not addressed, the nation may eventually face insolvency. While it is uncertain exactly when this will happen, it is almost inevitable unless Congress takes decisive steps to rein in its spending habits.
U.S. Fiscal Health in Jeopardy
In the summer of last year, Fitch Ratings downgraded the U.S. credit rating from AAA to AA+, reflecting the dysfunction in Washington, where members of Congress often use their financial authority to secure their positions. This behavior includes making costly promises to constituents and engaging in practices that enrich themselves at the expense of taxpayers. Both major political parties have been implicated in these corrupt activities.
The looming question is whether the U.S. will go bankrupt, and if so, when. If the economy remains strong, tax revenues may help to mitigate deficits, but as long as the government continues spending beyond its means, there will be a need to raise taxes and borrow more. A recession or a significant financial crisis could result in a shortfall in revenue, making it difficult to fund government operations. This scenario would likely lead to increased taxes, more borrowing, and further credit downgrades. A lower credit rating would make it more expensive for the U.S. to borrow money, increasing the cost of servicing debt. Until then, the country will continue operating on borrowed time and resources.
Analyzing Federal Government Overspending
Over the past 58 years, federal spending has grown more rapidly than revenues. Since 1966, government revenues have increased by an average of 6.47% annually, while expenses have risen by 7.05% each year. This persistent overspending has contributed to an average yearly increase of 8.37% in the national debt. When compared to inflation, which has averaged 4.00% per year, the national debt has grown at more than twice the rate of inflation.
Additionally, the U.S. labor force has only grown by about 1.37% per year since 1966. Factors contributing to this slow growth include increased productivity, a trend likely to continue with the rise of artificial intelligence and other technological advancements.
A Closer Look at Federal Revenue and Expenditures
Government spending tends to rise during periods of war or other unforeseen emergencies. For example, federal spending increased significantly during the 2008 financial crisis and the COVID-19 pandemic. During the 2008 crisis, spending spiked while revenue declined, resulting in the largest budget deficits in U.S. history at that time. It took five years for federal revenue to recover to pre-crisis levels, and even after the crisis, spending continued to rise.
Similarly, during the COVID-19 pandemic, federal spending surged dramatically. Revenue did decrease in the fiscal year ending on September 30, 2021, but only for a single year. However, the rate of spending growth far outpaced revenue growth.
The deficit grew to over $1.4 trillion in the fiscal year ending September 30, 2009, during the financial crisis. It then ballooned to more than $3.13 trillion in the fiscal year ending September 30, 2020, during the pandemic. Since then, annual shortfalls have ranged from $1.37 trillion to $2.77 trillion. This level of excessive spending is unsustainable in the long term.
The Mounting National Debt
The national debt now exceeds $35 trillion, equating to approximately $102,562 for each American citizen. Just two decades ago, the debt was $5.6 trillion, or about $19,760 per citizen. The ratio of national debt to GDP currently stands at over 123%. In 1980, this ratio was only 35.54%. By 2000, it had risen to 54.80%, and by 2020, it was 121.31%. Projections suggest this ratio could surpass 150% by 2028. This debt-to-GDP ratio is a barometer of the country’s capacity to repay its debt.
With federal spending continuing to outpace revenue, large deficits are likely to persist, making it increasingly challenging for Washington to meet the needs of the American people. This situation could lead to growing public frustration and potentially increase civil unrest. If Congress does not implement serious spending cuts and commit to greater fiscal responsibility, the next crisis could exacerbate the debt problem even further, accelerating its growth and pushing the nation toward a financial breaking point.
