U.S.

Donald Trump’s Tax Cuts, the ‘Misleading’ $22 Trillion Debt and Why America’s Rising Deficit Is the Real Issue

It’s an eye-wateringly large figure, $22 trillion. Almost unfathomable. But that was the size of America’s national debt at the end of 2018, a record high reached under President Donald Trump and a figure widely cited this week.

That number came from the Monthly Treasury Statement for December, which was published on Wednesday.

The full amount is $21,974,096,000,000, an annual rise of 7.2 percent and a significant acceleration from the previous year’s increase of 2.6 percent. However, there is more to this figure than first appears.

“It’s a little misleading because that is the gross amount, which includes ‘debt’ that various federal government departments owe to other departments,” Paul Ashworth, chief U.S. economist at the consultancy Capital Economics, told Newsweek .

“In particular, it includes nonmarketable debt that the federal government ‘owes’ to the social security and Medicare funds.

“That is just a way of keeping up the illusion that there is a real fund when in reality that spending is funded on a pay as you go basis—just as it is in nearly every other advanced country.”

In fact, the Monthly Treasury Statement shows there is $5.87 trillion in these “intragovernmental holdings,” bringing the debt figure held in U.S. Treasuries—government bonds—at $16.1 trillion.

Ashworth said the gross figure may also be affected by the debt ceiling, which is currently suspended.

“In this case the debt ceiling suspension is about to expire next month, so the Treasury is presumably issuing a bit more debt than it needs to ahead of the deadline, so it has more wiggle room (i.e., cash on hand) next month,” Ashworth told Newsweek.

“The Treasury currently has almost $400 billion in its account at the Federal Reserve, which is relatively high.”

The lower $16.1 trillion number is still a record for the amount of debt held in U.S. Treasuries.

But according to data from the Congressional Budget Office (CBO), the last time this debt fell was 2001, pointing to longer-term trends.

With every passing year under George W. Bush and then Barack Obama, the debt pile rose to a new record high. Why? The deficit.

Since 2001, when there was last a surplus, America’s public finances have been in deficit.

“Essentially, we’re spending more than we’re generating,” Greg Daco, head of U.S. economics at the consultancy Oxford Economics, told Newsweek.

“That owes largely to entitlement spending. So spending on programs like Medicare, Medicaid, programs like social security, and the tax base has not grown that rapidly on the revenue side.  

“If you assume that tax rates are constant, what can generate more revenue is your base, i.e., the income that’s generated is rising.

“But we know that over the past 10 years since the recession we’ve had a fairly slow recovery by historical standards and therefore the base for taxation has not grown rapidly.”

The deficit and what caused it long predates the Trump era.

But President Trump has quickened the rate at which the debt is growing by widening the deficit to finance his $1.5 trillion package of sweeping tax cuts, called the Tax Cuts and Jobs Act, which Congress passed in 2017.

Trump promised these tax cuts would pay for themselves by spurring on economic activity, but revenues have since stalled.

Moreover, the Bipartisan Budget Act 2018 lifted a number of spending caps on the government.

Federal spending by the Trump administration is around 6.6 percent higher than it was before he took office, equating to around $255 billion.

It is “largely owing to this massive fiscal stimulus” in both acts, Daco said, that the debt is growing at a faster rate again. In 2017, the national debt grew by 4 percent, according to CBO data, which excludes intragovernmental holdings. By the following year, Trump’s second in charge, this had accelerated to 7 percent.

It’s a similar story with the deficit. When Trump was elected in 2016, the size of the deficit measured as a portion of GDP was 3.2 percent. By the end of 2018 this had increased to 3.9 percent despite a period of strong economic growth.

Ashworth told Newsweek the deficit is expected to hit 4.2 percent in 2019. It is on course to reach a nominal value of $1 trillion by the end of the year.

“That increase comes despite the economy doing well and the unemployment rate declining. So, yes, it can be attributed largely to the tax cuts, which clearly aren’t paying for themselves, as most professional economists warned,” he said.

However, Daco said he does not think the deficit needs to be balanced for three reasons.

Interest rates are low and likely to remain so, keeping down the cost of borrowing for the government.

The dollar is the reserve currency of the world, so U.S. Treasuries are a safe haven for investors whenever there is volatility, underpinning demand for government bonds.

And America can, in theory, never default on its debt because the Federal Reserve controls the money supply.

Therefore, the Fed could print its way out of debt, though there are substantial risks to inflation in doing so.

“I think what’s more important is in the case of the U.S. looking at how the deficit is increasing over time and if it’s really exploding in an exponential way,” Daco told Newsweek. “What the key focus should be on is making sure that the deficit doesn’t get out of hand.”

Deficit, National Debt and U.S. Treasurys Explained

Deficit: A budget is in deficit if it has less money coming in than going out. The size of the deficit is the difference between income and spending. If you have $9 coming in and $10 in bills to pay, you are in deficit by $1.  

National debt: This is the money owed by the federal government. The government borrows money from the markets on which it pays interest to the lenders. How much interest it has to pay depends on a number of factors, such as demand, investor confidence in the borrower’s ability to repay and the economic outlook.  

U.S. Treasurys: When the government borrows money, it issues bonds, bills, and notes known as U.S. Treasurys. These have different lifespans. Sometimes they are for 10 years, sometimes longer, sometimes shorter. There are coupons attached to the bonds and notes for periodic interest payments to the lender. When they reach the end of their life, known as “maturity,” the full amount is repaid to the investor plus a final installment of interest. Also known as Treasurys Securities, they are also traded between investors once issued by the government.

How National Debt Has Grown Since the 1980s

This list, beginning with President Reagan, shows how the national debt pile grew under each presidency. The figure as a president leaves office is the starting point for the next leader, and the percentage given reflects the change over their entire presidency and subsequent one or two terms in the White House.

Ronald Reagan (two terms)
Took office 1981: $789 billion
Left office 1989: $2.05 trillion
Increase: 160 percent

George H. W. Bush (one term)
Left office 1993: $2.99 trillion
Increase: 46 percent

Bill Clinton (two terms)
Left office 2001: $3.63 trillion
Increase: 21.5 percent

George W. Bush (two terms)
Left office 2009: $5.8 trillion
Increase: 60 percent

Barack Obama (two terms) 
Left office 2017: $14.16 trillion
Increase: 144 percent

Donald Trump (first term)
Two years in, to December 31, 2018: $16.1 trillion
Increase: 14 percent

Source: Congressional Budget Office

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