U.S. government's annual budget deficit largest since 2012
Yes, the U.S. has a huge budget deficit for this year. So does Japan. Budget deficits, in effect, are governments borrowing money to spend today, and hoping that future generations will be able to repay that debt.
Is it sustainable?
Well, it really depends on the outlook for the future. In growing economies, it is highly possible that future government receipts (aka taxes) will be much higher than current levels due to private-sector growth (which brings in more corporate and personal income taxes). In such cases, the government borrowing money today to fuel infrastructure development (to assist further private-sector growth) becomes a sustainable model.
The converse is true, too. In economies which are not expected to grow much, it is unlikely that future government receipts will grow significantly. This presents a problem: current borrowing comes at a price, of course, in terms of interest. If taxes do not grow at a rate higher than interests being paid on current debt, the government will end up in a negative vicious cycle of debt.
Another way to look at it. If borrow money to buy a store in a new booming town, with high prospects of growing business in that town, it is likely that your earnings in the future will allow you to repay that loan. But if you are stuck in a job with little prospects for promotion, and are borrowing money to pay your apartment rent, it is unlikely for you to break out of that loan cycle anything soon.
In the case of the U.S., countries continue to lend the U.S. money (through buying of Treasury bonds) because they believe in the U.S. economy. They also lend the U.S. money to help their own economies. The U.S. government's spending has a multiplier effect that injects money into the economy, which means the private sector and individuals have money to spend on goods and services, some of which are offered/imported from foreign countries (those countries that finance U.S. debt). This win-win situation facilitated by trade is incentive for other countries to finance U.S. debt.
The worrying point then, is what happens should trade become more expensive. When protectionism is practiced. When countries find it harder to benefit from trade with the U.S., how likely are they to continue financing U.S. debt, since part of that incentive no longer exists (or becomes less attractive)?
Yes, the U.S. has a huge budget deficit for this year. So does Japan. Budget deficits, in effect, are governments borrowing money to spend today, and hoping that future generations will be able to repay that debt.
Is it sustainable?
Well, it really depends on the outlook for the future. In growing economies, it is highly possible that future government receipts (aka taxes) will be much higher than current levels due to private-sector growth (which brings in more corporate and personal income taxes). In such cases, the government borrowing money today to fuel infrastructure development (to assist further private-sector growth) becomes a sustainable model.
The converse is true, too. In economies which are not expected to grow much, it is unlikely that future government receipts will grow significantly. This presents a problem: current borrowing comes at a price, of course, in terms of interest. If taxes do not grow at a rate higher than interests being paid on current debt, the government will end up in a negative vicious cycle of debt.
Another way to look at it. If borrow money to buy a store in a new booming town, with high prospects of growing business in that town, it is likely that your earnings in the future will allow you to repay that loan. But if you are stuck in a job with little prospects for promotion, and are borrowing money to pay your apartment rent, it is unlikely for you to break out of that loan cycle anything soon.
In the case of the U.S., countries continue to lend the U.S. money (through buying of Treasury bonds) because they believe in the U.S. economy. They also lend the U.S. money to help their own economies. The U.S. government's spending has a multiplier effect that injects money into the economy, which means the private sector and individuals have money to spend on goods and services, some of which are offered/imported from foreign countries (those countries that finance U.S. debt). This win-win situation facilitated by trade is incentive for other countries to finance U.S. debt.
The worrying point then, is what happens should trade become more expensive. When protectionism is practiced. When countries find it harder to benefit from trade with the U.S., how likely are they to continue financing U.S. debt, since part of that incentive no longer exists (or becomes less attractive)?
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