Four years after passing a major tax cut that slashed federal revenues, Republicans are sounding the alarm again on the national debt.
President Joe Biden has already signed a $ 1.9 trillion coronavirus and economic relief program known as American rescue plan, and he’s pushing for perhaps trillions more in federal spending on infrastructure and other priorities.
A Republican argument against these measures has been their impact on the national debt, although Biden has also proposed tax increases to fund some of his plans.
Former United Nations Ambassador and former South Carolina governor Nikki Haley, a Republican, criticized Biden’s fiscal policy in a Facebook post on June 28.
“The national debt is now bigger than our economy,” she wrote. “That hasn’t happened since World War II – and this is peacetime. Joe Biden is digging a hole America can never fill. But he doesn’t care. When the bill comes due, he will be long gone. “
She’s right about the debt ratio – the country’s public debt exceeded its gross domestic product at the end of 2020, for the first time since World War II. But Haley’s post focused on a single measure of public debt. And it goes too far by associating Biden’s policies with the country’s debt burden.
The two parts of the debt-to-GDP ratio are closely related: Governments can take on more debt to finance programs that promote economic growth. And as a country’s economy grows, so does its borrowing capacity. But at one level, high public debt can also dampen economic growth by increasing borrowing costs for businesses and consumers.
Debt reaching 100% of GDP sounds scary, but economists say it’s not necessarily a worrying sign for a country like the United States that has strong credit, large reserve assets, and expansive borrowing capacity. . These countries can more easily manage their debt and keep their governments functioning over the long term, without resorting to tax increases, said Olivier Blanchard, former chief economist of the International Monetary Fund, in a 2019 speech. So the “hole” Haley refers to does not affect the United States as it would a weaker economy.
Still, it’s a development that is catching the attention of commentators and politicians, such as Haley, who is a potential 2024 presidential candidate.
Two measures of debt
There are two widely used measures for federal debt, and both are considered valid. Haley’s historical claim about the ratio is right if you use one measure and wrong if you use the other.
The smaller of the two digits is known as the government debt. This includes debt held by the general public through treasury bills, bonds and notes. Some are held by US nationals and others by foreigners.
The higher number is called the gross federal debt. It takes the public debt and adds to it the debt that the government owes itself. This usually happens when trust funds, such as those that pay for Social Security and Medicare, accept federal IOUs.
Haley is correct that public debt recently crossed the threshold of 100% of the country’s GDP for the first time since World War II. But it’s worth noting that this milestone happened at the end of 2020 – the last full year of Donald Trump’s presidency.
In that year alone, the ratio fell from 79% to 100%, as the government spent heavily to fight the coronavirus and the resulting economic downturn.
Meanwhile, gross federal debt has been equal to or greater than 100% of GDP at the end of each year since 2012. Thus, the year-end level was already there for most of Barack Obama’s administration. and throughout Trump’s.
What is Biden’s responsibility?
A representative for Haley told PolitiFact that his statement simply pointed to a fact about the level of debt and claimed that Biden’s policies would worsen that percentage in the future.
But Haley’s use of the word “now” in conjunction with criticism of Biden’s policies gives the impression that she is holding Biden accountable for a debt milestone that was passed before he took office.
Under Biden’s watch, the public debt-to-GDP ratio actually fell slightly below 100%. At the end of the first quarter of 2021it amounted to 99.75% of GDP. It could fluctuate over the next few months as the post-pandemic economic recovery accelerates.
the The Congressional Budget Office has forecast that federal debt would drop below 100% of GDP between 2023 and 2025 before rising to 106% in 2031, in part due to the deferred spending provisions of the US bailout. This analysis assumes that all other tax and spending laws remain the same, so this ignores Biden’s plans to raise taxes to pay off some of his spending proposals and otherwise increase tax collections.
In general, it is too simplistic to blame, or credit, any president for changes in the federal debt.
Much of our current debt level is due to mandatory spending on Social Security and Medicare, which has increased due to the aging of the baby boom generation. These expenses were essentially made on autopilot.
For other types of spending, it takes both the President and Congress to enact legislation, and control of the White House and Congress has shifted between parties in recent years.
Trump’s tax cuts in 2017 drastically widened the government’s annual deficits, but did not significantly change the debt-to-GDP ratio, as the economy grew alongside government borrowing.
Biden has proposed substantial spending increases to stimulate the economy. The American Rescue Plan Act cost $ 1.9 trillion and, according to the Congress Budget Office, would increase deficits by $ 1.8 trillion between 2021 and 2031.
Other elements of Biden’s agenda would be offset by tax increases, largely on businesses and wealthier Americans. It’s not at all clear that any of Biden’s pending legislative proposals will ever pass, let alone at the levels he originally offered them. Its infrastructure proposal, for example, has already been scaled back during bipartisan negotiations.
“Clearly, trillions of dollars have been decreed under Biden,” said Steve Ellis, president of Taxpayers for Common Sense. “But also, under Trump, Obama and George W. Bush. Whenever someone tries to attribute responsibility for the national debt to a politician, he has to take a few shortcuts with the truth.”
Haley said: “The national debt is now bigger than our economy. It hasn’t happened since WWII – and we are in peacetime. Joe Biden is digging a hole America can never fill. . “
In 2020, at the end of the Trump administration, public debt exceeded 100% of GDP for the first time since World War II. It’s been down since then.
A larger measure, gross federal debt, which includes funds loaned from one part of government to another, has exceeded 100% of GDP since 2012, long before Biden became president.
Changes in federal debt levels are driven largely by mandatory spending beyond the direct control of any president, and much of the rest was initiated by lawmakers and presidents on both sides. The debt-to-GDP ratio jumped in 2020 due to the federal response to the pandemic and the economic contraction.
We are evaluating the statement to be half true.