- The U.S. government is on track to run its first fiscal year deficit of more than $1 trillion since fiscal 2012.
- Economists and politicians were once very concerned about ballooning deficits, but the shortfall has been quietly growing since 2015, and because of super low interest rates and a healthy economy, nobody seems to care.
- As long as the economy grows and interest rates stay low, the markets — and politicians — will likely ignore the growing deficit and continue to propose new programs that will increase government spending.
The U.S. Treasury released eye-popping numbers this week that show the federal budget deficit is on course to cross $1 trillion in fiscal 2020, yet nobody seems to care.
The government ran a deficit of $357 billion in the fiscal quarter ending in December and is on track to reach $1 trillion this fiscal year for the first time since 2012. On a calendar basis, 2019 was the first year to touch $1 trillion since 2012.
As a result, the Treasury Department has been expanding its debt issuance to cover a deficit that has been rising every year since 2016, including a plan to issue a new 20-year note.
If interest rates "went up for a couple months, ... people would say this is getting more expensive," said Michael Schumacher, director rates strategy at Wells Fargo Securities. "Right now, they're not focused on it and that's one of the reasons why you have none of the political candidates focused on it. ... They don't care. The market is not penalizing them for it."
Strategists and economists say the ballooning deficit doesn't really matter, as much as it did when unemployment was high and the economy was weaker. Unemployment is now at five-decade lows, and U.S. interest rates are historically low, though higher than most other countries, making U.S. Treasury yields quite attractive.
"The deficits are big, but I don't think at this point they are problematic because you've got this relatively high global savings rate, and even though the U.S. deficits are large, they're still much lower than where they are in other parts of the world," said Joseph LaVorgna, chief economist Americas at Natixis. He said the deficit normally does not grow when the unemployment rate is low.
Just several years ago, politicians would have been bickering about high spending and high deficits, and in the past administration, squabbling over spending and deficits shut down the government.
"First, deficit hawks are now an endangered species in Washington. During President Obama's administration, Republicans worked hard to contain the deficit, insisting on rigid caps on spending," wrote Bank of America economists. "More recently not only have the caps been raised, but the recent tax cuts were funded mainly with additional borrowing."
But they don't expect a day of reckoning in the near future. "The cost is more subtle: heavy government borrowing diverts private saving away from private investment. This weakens trend growth in the economy. The house looks fine on the surface, but deficit termites are undercutting the foundation," the Bank of American economists said in a note.
They pointed out that Washington is not even focused on entitlements, like Social Security and Medicare, which are the fastest growing part of the budget. Those expenditures have been "off the table for some time," the economists said.
It's clear both parties would keep the spending spree going. The Trump administration is likely to push for further tax cuts and major infrastructure spending, while Democratic candidates have proposed expensive policies, like student loan forgiveness and Medicare for all, they noted.
The budget gap widened 26% in the fiscal year 2019 that ended Sept. 30, to $984 billion from $779 billion in fiscal 2018. For the calendar year 2019, the U.S. deficit was at $1.02 trillion as of Dec. 31. The deficit has been growing from a low of $442 million in 2015.
LaVorgna said with low unemployment, revenues should continue to increase and fill the Treasury's coffers.
"The issue will be, 'can we grow faster?' I think we will. ... It just seems everything is in place for 2020 growth to be better. If they're better, revenues will be better. And the deficit won't be a problem. That doesn't mean they won't be down the line," LaVorgna said.
LaVorgna said the fiscal 2019 deficit equaled 4.6% of GDP, a multiyear high but well below the 10% pace of 2009. "The problem is though it's the share of deficit of GDP. As a relative size of the economy, you would think it would be smaller," he said.
But he expects that number will shrink. In a chart tracking the unemployment rate against the deficit's percent of GDP, LaVorgna said the two numbers tended to track together, but as the deficit expanded in last several years, they diverged. "This is the largest since 2012 because the deficit is going up," he said. With a forecast of 3.5% unemployment in the current fiscal year, he expects the economy to pick up and the percent of GDP, represented by the deficit, should narrow.
"I do think over time, you have a very strong business approach, and the economy accelerates," he said.
Historically low interest rates globally are helping to mask the situation, for the time being.
"With negative rates in Europe, the US government is having no trouble funding itself at low interest rates, despite its large borrowing appetite. Some studies argue that US debt is reaching levels that have gotten other countries into trouble in the past, but we think the US has room to run," the BofA economists wrote.
They added that the U.S. has more leeway than other countries, since the dollar is the world's reserve currency, and the U.S. is at the center of global financial markets.