At the height of the Coronavirus pandemic, governments were desperate to rescue their nation from the depths of economic hell. Politicians grabbed a hammer and smashed the piggy bank into tiny pieces. But they found nothing except yarn and a button, seemingly because the rainy-day fund, collected when the sun was shining, had been plundered for extravagances and the cause du jour that mattered more than keeping the public purse solvent.
Since the Great Recession, governments worldwide have spent themselves into oblivion, damning the torpedoes full speed ahead to resuscitate the economy. With the coronacrisis blowing up the red ink-filled balance sheet, politicians’ pockets are empty, and they have resorted to deficit-financed spending to cushion the blow. This should serve as a lesson for leaders to keep their swampy hands off the rainy-day fund when it is sunshine and lollipops.
Ain’t No Sunshine
According to the Treasury Department, the U.S. budget deficit stands at $1.99 trillion so far in fiscal year 2020. This is a 267% increase from the same time a year ago. The substantial bump is due primarily to a record $684 billion in June, the sharpest month-to-month boost since April, when it surged $738 billion. The federal gap is poised to hit nearly $4 trillion, and this is without the administration's plans to introduce another stimulus package worth $1 trillion to $3 trillion.
Most of the red ink has been spilled into the Paycheck Protection Program and unemployment benefits. Last month, the U.S. government spent more than $1.11 trillion, up from $572 billion in May.
The national debt recently topped $26.5 trillion, up from around $20 trillion when President Donald Trump took office. Since the U.S. economy is going to need a lot more support in the coming months, Uncle Sam is going to take on more debt. He is putting everything on the credit card -- at least get a piece of plastic with some rewards!
And it is not just the United States enduring a fiscal calamity. Canada is forecast to post a $343 billion deficit, Great Britain’s budget gap is expected to swell to just under $400 billion, and Japan’s federal deficit is projected to increase nearly 8%. It should be noted that, like the United States, these countries already had recorded immense deficits during the good old days.
So, now what happens?
Where’s the Calculator?
Washington is trying all sorts of ways to prevent taxpayers from being forced to pay the bills. The Treasury is auctioning record amounts of bonds, while the Federal Reserve is monetizing the debt.
All levels of government will inevitably turn to the taxpayers to cover the immense outlays elected officials approved during the coronapocalypse. Everyone seems to have forgotten all the other egregiously high spending bills that came before. Many businesses, especially restaurants, are slapping a COVID-19 fee on their receipts. It is quite likely that the government would do something similar to help offset the ballooning deficit -- a 1% general sales tax or a temporary 5% special Coronavirus levy -- since it would be impossible to rely on only bond investors and the central bank to keep Uncle Sam’s head above water. Once the 2020 election season is over, the White House and the Congress will need to engage in serious discussions about how to pay for the biggest spending binge since World War II.
Lessons From Keynesians
The Keynesians tell us that government stimulus is an essential tool to help a nation navigate a recession. But before the COVID-19 financial crisis, the United States had been in an 11-year expansion period, and Republicans and Democrats still gorged on deficit-financed legislation. Policymakers refused to save for the chance of showers, choosing to feast on record-generating tax revenues and give Generation Zers and their successors the bill. So, is it too late to save for the future?
As many personal finance experts recommend, you must first pay off your debt. Considering that the United States failed to eliminate its previous debt load, Uncle Sam’s pockets are full of lint and he has sleepless nights like so many other indebted Americans. This was bound to happen as a $25 trillion debt and a $1 trillion budget hole are unsustainable practices. The virus outbreak infected more than three million Americans and pushed the United States off a fiscal cliff. And the Swamp cannot fight gravity.
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Read more from Andrew Moran.
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