US federal debt not sustainable, posing risks

To overcome the impacts of the COVID-19 pandemic and the resultant global economic slowdown, the United States administration has issued a series of fiscal stimulus packages, which has pushed up the federal debt.

At the end of January 2022, the US federal debt crossed $30 trillion for the first time, and could soon reach a new ceiling of $31.4 trillion. The underlying risks should not be ignored.

The US federal debt is characterized by rapid growth. Its debt increased from $6.23 trillion in 2002 to $28.43 trillion in 2021, growing on average 7.9 percent a year. In comparison, the US' annual GDP growth rate was only 4 percent during the same period.

Judging by indicators, the US federal debt has surpassed the prudential limit. The debt-to-GDP ratio measures the ratio of debt held by the public to GDP. Since 2010, this ratio for the US has exceeded the prudential limit of 60 percent and plateaued at 100 percent in 2020, which means there is limited room for federal borrowing.

The national debt dependence degree is the proportion of new debt issuance against fiscal expenditure for the year, and generally ranges between 15 percent and 20 percent for developed economies. However, starting in 2002, this indicator for the US exceeded 65 percent. With a 20-year annual average rate of 73 percent, the US federal spending has become over-dependent on debt.

The national debt service ratio is the ratio of debt service to the fiscal revenue of the year. At the US federal level, it has reached 68 percent in the past two decades, far exceeding the prudential limit of 10 percent, and the US federal government has been heavily burdened by its debt service pressure. The inherent institutional pitfalls for the US federal debt system have inevitably led to the current huge debt accumulation.

There is a ceiling for US federal debt but that is easily breakable. The debt ceiling was created by the US Congress via the Second Liberty Bond Act, which included an aggregate limit on federal debt and other specific debts. Although the intention of the debt ceiling was to empower the Congress to harness federal spending, in practice, the federal debt has been breaking new records.

The sad truth is that, to prevent the government from defaulting and avoid a government shutdown, the Congress has no choice but to keep raising the debt ceiling.

Since 1960, the US debt ceiling has been adjusted about 80 times. Thus, the limit on federal spending is loose. There are fundamental reasons for that. For one, the Congress only sets a limit on the US federal government's outstanding debt. However, there is no supervision on capital flow and usage of money. As a result, the government's decisions to raise the debt ceiling cannot be checked.

Two, there is a gap between the debt ceiling policy and fiscal policy in the sense that raising the debt ceiling will not trigger fiscal deficit; it will only hinder the federal government's ability to pay off the debt. The gap between the two policies is very difficult to bridge and thus renders the debt ceiling ineffective from a practical point of view.

The debt disclosure is a well-established part of US policy, but not the use of proceeds. In general, the US Treasury and relevant websites provide material information on federal debt. Also available on the websites are rules for disclosure on specific bond products including the rates and terms, auction and redemption, and taxes. This has facilitated the expansion of the primary and secondary market, which in turn makes federal borrowing convenient.

Despite that, however, the federal government discloses few details on how the proceeds raised from the public and abroad are used. The only known purpose is to finance the government's activities and the securities issued are collectively labeled debt held by the public. Neither is the public aware of whether their money is responsibly and wisely spent nor is the Congress capable of monitoring the direct use of the proceeds raised through federal bonds.

Leveraging the dominant role of the US dollar in the international market, Washington is highly likely to continue borrowing from the American public and other countries, and keep on raising its budget deficits. And, in the absence of wise intervention, the US' debt ratio will continue to widen, debt ceiling continue to rise, fiscal deficit continue to grow, and the economy further move away from the sustainable path.

The author is a Beijing-based commentator on international affairs. The views don't necessarily reflect those of China Daily.

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