Skyrocketing deficits due to uncontrolled public spending and a policy of pro-business tax cuts. A debt/GDP ratio of the administrations that has jumped 14 points since Covid and exceeds 122%. Debt service that will become the largest item of public spending in 2024…
We are not in France but in the United States. According to projections by the US Congressional Budget Office (CBO), the federal deficit should reach 7% of GDP this year (almost one point more than in France). The so-called gross public debt (the debts of all government agencies) is increasing again after the fever of the health crisis. Standing at 122.3% of GDP at the end of 2023, it even exceeds its level of 1946 (119%) after five years of world war.
Its amount reached 34.5 billion dollars, that is, six times its gross amount in 2000 and more than 10 times that of 1990.
A level that weighs on the nation’s public accounts, since debt service (interest payments) should reach 870 billion dollars for the current year, or 20 billion more than the budget dedicated to defense.
“In the CBO projections (with unchanged policy), the budget deficit is assumed not to shrink primarily due to increased health spending (going from 5.6% to 6.7% over the next decade) and interest on the debt (from 3.1% to 3.9%) The debt ratio would increase, up to 116% in 2034, 139% in 2044, 166% in 2054”, remembers Bruno Cavalier in a note, Oddo economist.
An unsustainable trajectory
A situation that should convulse the country and be at the center of the political debate between the two candidates for the White House. Which is not the case at all.
If the economy is at the center of the campaign, as in all elections since at least 1992 and the famous slogan “It’s the economy, stupid.” of Bill Clinton, we are not talking about public finances. Housing difficulties, cost of living, inflation, employment, interest rates, attractiveness, reindustrialization, Chinese competition… This is what worries Americans and the questions posed to candidates.
“The debt trajectory described by the CBO is not sustainable, everyone knows it, but neither candidate prioritizes reducing the budget deficit, notes Bruno Cavalier. In both cases, the proposed measures are even more likely of increasing the deficit.”
Therefore, the average American scoffs at the state of public finances, which is far removed from their daily lives. Campaigning candidates logically make an avalanche of costly promises of tax cuts for the middle class.
Even more surprising is that the rating agencies don’t seem too concerned about the situation. US debt certainly lost its triple-A rating from Fitch in 2023, but maintained the top rating from Moody’s and S&P.
While in France, the budget issue becomes a major national cause with its budget scrutinized, its deficit trajectory under observation and the differential with Germany a source of daily anxiety, in the United States the same causes produce effects everywhere else. Does Emmanuel Macron, who has always favored activity and employment over strict budget orthodoxy, have the American economic software?
An American culture of debt
In any case, the cultural element cannot be ruled out. With a very different vision on both sides of the Atlantic. The control of public finances is, therefore, a key point of the Maastricht Treaty, with the famous 3% of GDP rule included in the text, when none of that exists in US legislation.
“In the United States there is a habit of managing debt, American households are much more indebted than in Europe, consumer credit is part of their daily life, while in France it is almost non-existent,” says Philippe Crevel, from the society of Lorello research. Ecodata and director of the Savings Circle. “The country favors growth and employment, which are also part of the objectives of the Federal Reserve, which does not happen in Europe with the ECB.”
French and European reluctance in the face of American audacity and optimism? If the cultural issue is part of the equation, it is not the only term.
“The historical element is also important,” considers Christopher Dembik, strategist at Pictet Asset Management. The United States has always been able to quickly reduce its deficits, and this was systematic after global conflicts that caused a burst of military spending.
Good debt and bad debt
But the fundamental explanation has to do with the nature of the US debt itself. Much of the global public debt is not in the markets. The federal system allows states to buy debt from each other, while in the eurozone this is only done temporarily during temporary debt programs. quantitative easing.
“A significant part of this is in the hands of the government itself, particularly through the Social Security Guarantee Fund,” explains Barry Eichengreen, professor of economics and political science at the University of California at Berkeley. The Treasury of this portion represents the interest income of the Guarantee Fund: the government only pays interest to itself.
The debt in the hands of the public, that is, in the markets, represents “only” 99% of GDP. A level already lower than that of many European countries, including France.
Above all, this dollar-denominated debt is a product in high demand around the world. US Treasuries are considered the risk-free assets that markets and governments love. For example, China has $1.15 trillion in U.S. debt, making it the United States’ largest creditor.
Long-term capital inflows to the United States represent 6% of GDP, a level roughly equivalent to the federal public deficit.
An exorbitant advantage that is above all a consequence of a much more dynamic economy. This is the other big difference with Europe. Since 2022, US growth has averaged 2.8% per year, while in France – far from being the worst performing country in the euro zone – it has peaked at 1.5% per year during this same period.
A deficit that generates growth
“The American public deficit allows an increase in productivity of 3% annually, which is really enormous, when in France we are at -1%, summarizes Christopher Dembik. There are good and bad American public policies aimed at dynamic sectors. activity, favoring the relocation of industries, semiconductors for example. In France we are in operating expenses or safeguarding purchasing power.
In the United States, the Inflation Reduction Act (IRA), which caused the deficit to increase, represents an investment in tax credits estimated at $428 billion between now and 2033, according to the CBO. But this financial sacrifice should translate into $3 trillion in public and private investment over the next ten years. Colossal quantities that are already giving rise to a spectacular reindustrialization movement. Mega battery factories from Korean or Japanese groups, expansions of electric vehicle production centers like those of Volkswagen, a multitude of projects from solar panel manufacturers… Every dollar of deficit produces positive effects on growth and employment.
In fact, public spending in France is much less productive. In 2022, public social spending (old age, health, family, unemployment, poverty-exclusion, etc.) represented 31.6% of GDP (it was 18% in 1973) compared to only 18.5% in the United States according to the OECD.
Source: BFM TV
