25 July 2023
The U.S. budget deficit is worsening this year due to the Inflation Reduction Act and CHIPS and Science Act of 2022, adding over $1 trillion to the deficit over the coming years. This is in line with falling real gross domestic income (GDI) in three out of the last four quarters. Larger interest payments and diminished tax revenues increase the deficit without boosting economic activity.
Research suggests that the government expenditure multiplier is positive for the first four to six quarters after the initial deficit financing, then turns negative after three years. This means debt-financed federal expenditures could ultimately reduce private GDP.
Two studies found that government fiscal policy actions that increase government size or debt relative to GDP significantly weaken economic growth. The impact of government size relative to GDP is becoming increasingly negative.
In early 2023, the government’s size was 34.3%, and real per capita GDP/GDI average growth was 1.3%, indicating an increase in government size and a decrease in economic growth. Studies show when gross government debt exceeds 90% of GDP for over five years, economies lose a third of their trend growth rate.
Productivity has been falling at a record pace over the past ten quarters, which could be due to an ongoing wave of boomer retirements. The replacement of skilled workers with unskilled generation Z workers could be leading to this productivity drop.
The increasing budget deficit and decreasing productivity and growth suggest that the U.S. could be heading towards a recession, contrary to current economic forecasts.