‘Deficit Day’ Is No Cause to Celebrate as Spending Exceeds Taxes

The federal government will spend $7 trillion in 2025. That’s roughly $19 billion per day, or around $50 million in the time it takes to read this article. On the other side of the ledger, the government will collect $5.2 trillion in taxes. Careful readers will already see the problem.

That $5.2 trillion dribbles in over the course of the year as households and businesses pay their taxes. But imagine if the IRS received the full $5.2 trillion on Jan. 1 and the government spent at a constant $19 billion per day. At some point in the year, the money would run out.

That day is Deficit Day, and this year, it fell on Sept. 21.

Every day from today until the end of the year, Washington adds another $19 billion to a debt that already tips the scales at $37 trillion.

Were the budget balanced, the government would spend its last penny at the stroke of midnight on New Year’s Eve, and there would be no Deficit Day. The bigger the deficit, the earlier Deficit Day arrives. On average, since 2001, Deficit Day has fallen on Sept. 12. That’s like a household running out of money a week before the end of the month. Every month. For 25 years.

The latest Deficit Day in recent years was Nov. 15, 2017, when the federal government spent $1.15 for every dollar it collected in taxes. And that’s as good as it’s been recently. The earliest was April 30, 2020, when the government cut all those Covid-19 stimulus checks, spending over $3 for every $1 it collected.

When comparing government debts across countries, it’s typical to describe them as fractions of gross domestic product. (The US government’s debt is currently almost 125% of its GDP.) But because the government doesn’t own GDP, debt-to-GDP only tells us how big the debt is rather than whether the government can afford it.

It’s like comparing your household’s debt to your employer’s profits. You don’t own the profits; your employer does. A better measure is the government’s debt to the government’s tax revenue. That’s the same measure mortgage lenders use.

In 1981, the government’s debt was 1.6 times its tax revenue. The rule of thumb when buying a house is that your mortgage should be less than five times your annual income. If anything, in 1981, the government could have afforded more debt.

And take on more debt it did.

Today, the government’s debt is around seven times its annual income. If today’s government were a home buyer, lenders would be turning it down. But unlike a mortgage, the government doesn’t need to pay off the debt. It only needs to make the interest payments, though even that is becoming a problem.

The government currently pays an average interest rate of 3.4% on its debt. But 3.4% on $37 trillion is a whopping $1.2 trillion per year. To put that in perspective, each year, debt interest costs the federal government 1 1/2 times what the entire Department of Defense costs.

The debt has become so large that small changes in interest rates now have massive implications. Just a one percentage point increase in interest rates eventually would cost the federal government an additional $400 billion per year in interest expense. Adjusted for inflation, that’s more than double the peak annual cost of the Iraq War.

This has dire implications for monetary policy. The Federal Reserve has two goals: maintaining full employment and keeping prices stable. The government’s debt is causing a third goal to emerge: maintaining the government’s solvency.

As the debt grows, this third goal will overshadow the other two, forcing monetary policy to conform to fiscal policy. The Fed gradually will cease to be a stabilizing hand on the economic rudder as it’s forced to become the government’s ATM. This means that low inflation will be a thing of the past.

Inflation is already running a full percentage point above its pre-Covid average. Increased government borrowing will put upward pressure on interest rates. To alleviate that pressure, the Fed will cut short-term rates. That will cause the money supply to grow, and that will push inflation higher.

Americans should expect long-term rates to remain elevated, and they should get used to a new normal of elevated inflation. Like a household, a government can’t keep spending beyond its means. Unlike a household, it can force others to pay the price for its irresponsibility.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Antony Davies is an economist and an adjunct scholar at the Cato Institute.

James R. Harrigan is a political scientist and chief operating officer of Polyhymnia.org.

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