US federal debt is an issue that seems to have fallen out of public discussion. Yet behind the scenes, year by year, debt continues to grow at a rapid clip. Enter COVID-19 and the resulting economic shutdown, which will inevitably necessitate a new wave of stimulus spending from the government, one that might even surpass those which followed in the wake of the Great Recession. As the firehose of stimulus spending is opened, what had previously been a gradual incline of debt accumulation over the Trump era will spike. What will this mean for the long-term fiscal health of the United States?

Analysis

The US federal debt currently stands at around $23.5 trillion, which is roughly equivalent to 108% of GDP. The ratio of debt-to-GDP in the United States has climbed precipitously over the past two decades. In 2001 – the last year that the government ran a surplus – the ratio was just 31% of GDP. Since then, successive presidents have piled on debt, with the GW Bush tax cuts and the Obama recovery efforts from the Great Recession standing out as two huge leverage spikes (they added $5.86 trillion and $8.59 trillion respectively over their time in office). Donald Trump hasn’t exactly stood out as a paragon fiscal prudence either, adding some $4.78 trillion in debt and so far – a number that’s primed to balloon further in the months ahead.

The debt is broken down as follows: around 26% is owned by foreign governments and the rest by the public, which holds some $17.1 trillion worth. Foreign holdings amount to around $6.77 trillion; pension funds $2.6 trillion; monetary authorities (namely the Fed) $2.32 trillion; mutual funds $2.11 trillion; individuals $2.02 trillion; state/local governments $620 billion; banks $923 billion; and insurance companies $361 billion.

Now let’s consider the present situation.

The government’s budget deficit was a staggering $1.02 trillion in 2020, as per a report from the Congressional Budget Office released well before COVID-19 had landed in the United States.  That is equivalent to around 4.1% of GDP and it represents a high level of deficit spending for a country that is already in the triple digits for overall debt-to-GDP.

The Trump administration has floated a $1 trillion stimulus package in response to the outbreak which would include, among other things, direct cash payments to US citizens impacted by the virus and presumably corporate bailouts to hard-hit industries such as air travel.

Though Trump has earned some praise for his swift action on stimulus (after a short and hugely damaging stint of conspiracy theorizing COVID-19 as a ‘hoax’), this huge assistance package is likely to be the first of many – and this will have serious fiscal ramifications for the short- and medium-term fiscal health of the United States.