Visualizing U.S. Budget Gap That Scares Everyone Except Markets

(Bloomberg) -- The expanding U.S. budget deficit is putting federal debt on course for levels last seen during the World War II era, a shift that may test the bond market’s willingness to keep funding the government at relatively low costs.

Total federal debt held by the public rose to $16 trillion in 2018, or 78 percent of gross domestic product, and in coming years is expected to surpass the record 106 percent reached in 1946 in the aftermath of mass spending to fund the war, according to the Congressional Budget Office.

Figures out Tuesday showed the deficit widened 77 percent in the first four months of the fiscal year through January, while Treasury Secretary Steven Mnuchin this week invoked special accounting measures through June 5 to continue paying the U.S. government’s bills without breaching the legal debt ceiling, which resumed March 1.

Visualizing U.S. Budget Gap That Scares Everyone Except Markets

The growing debt pile worries current and former Federal Reserve officials and policy makers on both sides of the aisle, on the basis that it will eventually erode America’s credit. Yet the debate has become complicated in recent years by Republican support of tax cuts that have blown out the budget gap, and by support among some Democrats for policies such as universal health care that would require big increases in borrowing -- roughly $30 trillion over a decade by some estimates.

Here are four charts that shed light on the current U.S. debt situation:

1. Major Interest

A growing chunk of these payments is interest on issued debt. In fiscal 2018, they topped spending for veterans’ benefits, education and space and technology combined. The CBO estimates annual interest payments on the national debt will hit about 3 percent of GDP in 2029, 1 percentage point higher than the 50-year average.

Visualizing U.S. Budget Gap That Scares Everyone Except Markets

2. Market Acquiescence

Rising borrowing costs add to that pain, as the average interest rate on Treasury securities is now the highest in eight years, thanks to Federal Reserve hikes and solid economic growth. Even so, it’s well below the 6.7 percent reached in 2000.

And financial markets appear to be OK with the state of the federal debt. In addition, some mainstream economists have recently shifted their view on the risk of expanding deficits, highlighting the social benefit of programs and noting the lack of high inflation lately.

Visualizing U.S. Budget Gap That Scares Everyone Except Markets

3. Tax Shares

Revenue from corporate income taxes has dropped to 1 percent of GDP in 2018 from 3.7 percent in 1969, with individual taxes now accounting for about 8.3 percent, nearly unchanged over that period, according to the CBO. The agency expects corporate income taxes as a share of GDP to rise only slightly over the next decade.

The government fiscal stimulus that included large tax cuts for corporations and helped juice the economy in 2018 also added $1.9 trillion to the deficit in the decade through 2028, the CBO said.

Visualizing U.S. Budget Gap That Scares Everyone Except Markets

4. Costs of Aging

One reason the CBO and others project the national debt to balloon is an aging population, with the number of people 65 and older set to rise at a faster pace than working-age Americans over the next quarter century. That requires bulked-up health-care programs and social security as baby boomers retire and live longer on these payments.

Visualizing U.S. Budget Gap That Scares Everyone Except Markets

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