As shown in this week’s chart, the percentage of U.S. GDP now being spent on interest payments (maintaining U.S. government debt; red line) has risen substantially in recent years to the current level of 3%. Notice the percentage of GDP spent on interest costs is now at similar levels to those experienced in the 1980’s and 90’s when interest rates were substantially higher than they are today. This is a result of absolute and relative U.S. debt levels being much higher today than they were then. Also notice the U.S. federal budget balance as a percentage of GDP (blue line) has been going the wrong way since the late 1990’s - the last U.S. president to run a budget surplus was Bill Clinton. Notice the size of the U.S. deficit is much smaller now than it was during the depths of Covid, however, at 7.2% of GDP, it remains at a high level, especially considering the U.S. isn’t currently in a recession. Typically, government spending is increased to offset the negative impact of recessions and then decreases as the economy exits recession and begins to grow. In this way, deficits can be used as a shock absorber during times of economic weakness. However, since the late 1990’s, we’re witnessing a phenomenon known as structural deficits – subsequent U.S. governments running deficits regardless of the strength of the economy. This is akin to you or I spending beyond our means, year after year, until we hit the debt wall. Just like individuals, countries can go bankrupt. Many countries have declared bankruptcy over the years, countries like Argentina have done it several times by running large deficits and taking on too much debt. As the world’s largest economy and reserve currency, the U.S. defaulting on its debt could upset the world order and would undoubtedly have a significant negative impact for the global economy.

In Canada, thankfully, we’ve been more prudent and haven’t run as large of deficits for as long as they have been in the U.S. However, the concern is that we could be heading down a similar path to the U.S. if the federal government doesn’t have a plan for running budget surpluses in the foreseeable future.