U.S. debt: Is it the calm before the storm?

The U.S. national debt has crossed $22 trillion—the highest ever. In the first four months of the 2019 fiscal year (October 2018-January 2019), the federal budget deficit ballooned to $310 billion, up 77 percent from the same time last year, as revenues fell 2 percent to $1.1 trillion and spending rose 9 percent to $1.4 trillion, according to a Treasury department report.

“The growth in debt is very closely in line with our previous projections of the impact of the Tax Cuts and Jobs Act,” says Kent Smetters, Wharton professor of business economics and public policy. He is also faculty director of the Penn Wharton Budget Model, which analyzes the fiscal impact of public policies. “Debt is on an exploding path right now,” he says. “It is hard to definitely pin down a date of ‘no return.’ But, under the current debt path, we currently estimate that the government will have almost no reasonable options left, outside of debt default, in about 25 years.” 

 stack of money

For now, the U.S. is not close to a day of reckoning. “For the next five years, we will be fine,” says Wharton finance professor Joao Gomes. “But you only need to look at, say, southern Europe and our friends in Greece or Spain to see there comes a day, and that day is not pretty,” he added. “That’s the day when you have to make all the adjustments all at once. You have to go on a draconian diet, and you have to cut down on services that we get from the government.”

Read more at Knowledge@Wharton.