The Looming Threat of a Federal Government Shutdown

As the prospect of a federal government shutdown looms large, lawmakers continue to grapple with spending issues for the year 2024. However, this ongoing battle over funding allocation has shed light on a much more pressing concern: the deteriorating national debt of the United States.

Investors are growing increasingly apprehensive as they fear a potential decline in demand for Treasury bonds. In such a scenario, the government would be compelled to pay higher interest rates to secure borrowings, leaving fewer funds available for essential areas like national parks and the highway system.

Unfortunately, political squabbles surrounding budgetary matters exacerbate the problem. Earlier this year, Fitch downgraded the U.S. debt rating from AAA to AA+ due to repeated debt-limit disputes and eleventh-hour resolutions by the federal government. On Monday, Moody’s expressed concern that a government shutdown would have a negative impact on the country’s credit while highlighting the weaknesses in its institutional and governance framework.

However, it is crucial to remember that the United States is not alone in facing this predicament. Furthermore, among developed nations, it is not even in the worst position.

At its core, the issue is rather simplistic. To cover the costs incurred by numerous government agencies and programs across the country, the federal government must resort to borrowing trillions of dollars annually. Tax revenues alone prove insufficient for this purpose.

Consequently, each passing year witnesses an increase in the national debt as budget shortfalls continue to accumulate. As of this month, the total amount stands at a staggering $33 trillion—an astonishing 124-fold surge compared to 70 years ago.

While this may sound alarming, the situation was relatively manageable before the 2000s. Back then, the economy, as measured by domestic gross product, was growing at a rate parallel to or even faster than the debt. This ensured that the federal government could rely on tax revenues keeping up with the servicing costs associated with its borrowings.

So now, as the impending threat of a government shutdown looms over the United States, it is not just the immediate consequences that should concern us. It is essential to recognize the broader issue at hand—a mounting national debt that demands urgent attention and effective solutions.

The Growing Challenge of Government Debt

Debt is becoming an increasingly pressing concern as it outpaces economic growth. In fact, the government’s outstanding borrowings have exceeded the annual GDP of the United States for about a decade now. This startling fact means that dedicating an entire year’s economic output solely to debt repayment would still fall short.

The debt-to-GDP ratio, a crucial indicator of a government’s financial sustainability, reached its peak during the Covid-19 pandemic. To support the struggling economy, the federal government had to obtain substantial amounts of money, resulting in a significant rise in this ratio. Although it has receded somewhat since then, the total federal debt still stands at 120% of GDP according to the Office of Management and Budget.

Unsurprisingly, the U.S. government claims the title of having the largest outstanding debt globally. Its total debt surpasses that of China, which ranks second with around $14 trillion as of the first quarter—nearly five times the amount of a decade ago. Japan follows as the third-largest debtor, although its debt has been gradually decreasing over the past ten years.

While it is logical for the world’s largest economy to possess the greatest national debt, it should be noted that the U.S. does not possess the worst debt-to-GDP ratio. Many OECD nations, in addition to financially fragile developing countries, actually have national debts that exceed their GDPs. Over the past decade, nearly all countries have experienced a deterioration in this situation.

Measured by this metric, Japan claims the unfortunate title of having the most severe debt challenge across the globe as its total national debt is twice the size of its GDP in 2022. Greece, which has been recovering after narrowly escaping bankruptcy during its debt crisis a decade ago, also contends with a high debt-to-GDP ratio.