Three Years of Trump Administration's 'Boom' Shadowed by Over $1 Trillion Fiscal Deficit

Government Debt Rises by $3 Trillion After Taking Office, Contrary to 'Zero Dollar' Pledge
Academics Divided Over Austerity... Policy Capacity vs Economic Slowdown

[Image source=AP Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] On the 20th (local time), marking the 3rd anniversary of his inauguration, U.S. President Donald Trump is pleased when thinking about the economy. The longest economic expansion in history has continued for 127 months, and the unemployment rate has fallen to 3.5%, the lowest in 50 years since 1969. However, the "overflowing fiscal deficit" during his three years in office is expected to blemish his economic achievements. Contrary to his campaign promise to eliminate the fiscal deficit within eight years of his election and reduce the government debt, which exceeds $19 trillion (approximately 22,009 trillion KRW), to zero dollars, the fiscal deficit has surpassed $1 trillion, and the debt has increased to $23 trillion. Domestic and international experts warn that if the U.S. fiscal deficit worsens, the U.S. government may lack the capacity to properly respond to unexpected variables such as the U.S.-China trade dispute and geopolitical crises in the Middle East.

According to the U.S. Treasury Department and others on the 14th, the U.S. federal government's fiscal deficit from the beginning to the end of last year was $1.02 trillion. It is the first time in seven years that the fiscal deficit has exceeded $1 trillion. The fiscal deficit has surged sharply under the Trump administration. The fiscal deficit for the last fiscal year (October 2018 to September 2019) was $984.3 billion, a 68% increase compared to $585.6 billion at the beginning of 2017 when President Trump took office. The U.S. Treasury Department forecasted in a currency report released the day before that the fiscal deficit for the 2020 fiscal year (October 2019 to September 2020) would reach $1.05 trillion.

Last year, government debt was also recorded at $23.2013 trillion, an increase of more than $3 trillion from $19.9768 trillion at the beginning of 2017. President Trump pledged to eliminate both the fiscal deficit and government debt when he took office, but instead, the fiscal deficit and government debt have expanded since his administration began. The U.S. fiscal deficit draws attention because it is considered the Achilles' heel of President Trump's economic policy. There is heated debate in academia about the Trump administration's fiscal deficit. The expansion of the fiscal deficit is seen as a risk factor because it makes it difficult to operate fiscal policy when the economy fluctuates. However, some argue that given the large size of the U.S. economy and the ongoing economic boom, it is not a significant problem.

The U.S. Congressional Budget Office (CBO) warned that the fiscal deficit is increasing at too rapid a pace. According to CBO data, the fiscal deficit as a percentage of Gross Domestic Product (GDP) averaged 2.9% annually over the past 50 years but rose to 4.7% last year. Considering population aging, increased medical expenses, and rising interest costs, it is expected to rise to 8.7% by 2049. Earlier in August last year, CBO Director Philip Swagel warned that "government finances are heading toward an unsustainable path."

Trend of U.S. Fiscal Deficit Relative to GDP [Source: U.S. Congressional Budget Office (CBO)]

Harvard University Professor Kenneth Rogoff pointed out at the American Economic Association (AEA) on the 3rd that "the fiscal conditions of advanced market economies, including the U.S., have revenue structures that cannot sustain expenditures and could act as a trigger for economic crises." Harvard Professor Larry Summers also warned, "Fiscal spending has already expanded enormously, and there is no capacity to respond to crises." Given the 127-month-long economic expansion phase that could turn to slowdown at any time, along with heightened geopolitical risks such as the U.S.-China trade dispute and Middle East tensions, the deepening fiscal deficit raises concerns that the U.S. government's ability to respond will be significantly weakened.

On the other hand, there is considerable opposition arguing that suddenly shifting to austerity to curb the fiscal deficit would be even more dangerous. Former Federal Reserve Chair Janet Yellen, who appeared as a panelist at the AEA, argued, "To prevent a Japan-style long-term recession, monetary policy should maintain low interest rates while fiscal policy should be further expanded." Former Fed Chair Ben Bernanke also stated, "Since there is still sufficient capacity to respond even if a recession occurs, more proactive policies are required."

Domestic economic experts view the U.S. fiscal deficit situation as not yet alarming and are optimistic that the Trump administration has sufficient ability to control the situation. Kim Sung-tae, head of the Economic Outlook Division at the Korea Development Institute (KDI), said, "Although the U.S. debt-to-GDP ratio is burdensome, the unemployment rate remains low and private consumption is strong, so the fiscal deficit is not considered a major risk." Kwon Young-sun, head of the Global Research Center at Woori Financial Research Institute, also predicted, "Although there are expected risk factors such as fiscal deficit and debt concerns, Middle East crises, and President Trump's re-election issues, these are manageable by the Trump administration and the Fed, so the U.S. economy will not suffer a major shock."

This content was produced with the assistance of AI translation services.