Opinion: The Biden administration has inadvertently reduced the debt-to-GDP ratio, in the worst way possible
Government debt as a share of the U.S. economy is falling. This must mean the Biden administration and Congress are practicing fiscal responsibility, right? No, it doesn’t. The main driver behind the reduction is inflation — inflation that politicians in Washington created with their irresponsible spending and refusal to engage in austerity after the COVID-19 crisis.
Public debt since 2020 has grown by $3 trillion. According to the latest Monthly Treasury report, government spending in March of 2023 alone was twice the revenue collected. The deficit in the first six months of fiscal year 2023 is about 80% as large as the deficit for the entire FY2022. Our mid-year deficit is $1.1 trillion, compared to $667 billion at the same point last year. Falling revenue collection is responsible for only 17% of this difference.
The administration’s handling of this post-emergency phase is unusual. In the past, there was a clear understanding that while spending, deficits and debt would grow during an emergency, spending reduction and other forms of austerity would be necessary afterward. These were implicit fiscal norms that authorities on the Right and the Left understood and lived by.
It’s the inflation, which came as a surprise to so many, that’s led to the decrease in the debt-to-GDP ratio. According to an International Monetary Fund fiscal monitor study, in countries with debt-to-GDP over 50%, for every 1 percentage point of unexpected inflation, the debt ratio will be reduced by 0.6 percentage points. This perfectly explains most of the debt-ratio decline.
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