AFTER the victory celebrations have ended, whoever wins tonight’s US presidential election will face a nasty, prolonged, economic hangover. And, as Britain’s closest ally, what happens in the US will have firm implications for this side of the Atlantic.
It has been a bitter and unpleasant campaign and, unless a tribal and divided Congress can reach a budgetary deal, about $600bn (£375.6bn) in tax rises and spending cuts will come into effect at the beginning of January. The omens for successful resolution are not good and the impact remains uncertain. The US is close to the fiscal cliff and may not avoid falling off.
The basic problem is that the US federal government is spending more as a proportion of GDP than at any time since the Second World War. At the same time, revenues are their lowest since 1950. Federal spending is expected to be 24 per cent of GDP this year, only marginally below 2009’s figure of 25 per cent – the highest since 1945. Revenues are expected to drop to 14.8 per cent of GDP in 2012.
This combination of low revenues and high spending has inevitably led to the highest annual deficits since the Second World War. As a consequence, the US government is now borrowing roughly 40 cents of every dollar spent.
Debt has spiralled. Over the eight years of George W. Bush’s presidency, it rose from $3.339 trillion in 2001 to $6.369 trillion by the end of 2008. And in just four years of Barack Obama’s presidency debt has reached $11.12 trillion, while showing no sign of slowing. Put another way, debt per US citizen was $6,435 in 1970. By 2001 it was $14,534 and by 2012 it had reached $36,267. On current trends it will reach $100,000 per citizen by 2030.
The interest on this debt accounts for $227.1bn, or 5.7 per cent of all government spending. This is more than is spent on education, homeland security and veterans affairs combined.
There are those who say it doesn’t matter – that the US is too big to fail. But they should think again. Researchers have identified 26 episodes of public debt overhang, when debt to GDP ratios exceeded 90 per cent, since 1800. They discovered that, in 23 of these 26 episodes, countries experienced lower growth than the average across other years. Across all 26 episodes, growth was lower by 1.2 per cent. If this effect sounds modest, consider that the average duration of debt overhang episodes was 23 years.
This is not a short-term problem, and recent administrations have singularly failed to tackle it. US government debt peaked at 121 per cent of GDP in 1946, the highest level in the country’s history. A period of rapid, stable economic growth during the 1950s and 60s meant that debt fell by the end of 1975 to 33 per cent of GDP.
But the Reagan tax cuts, Cold War defence spending, the Gulf War and the recession of the early 1990s all pushed debt to a 40 year high in 1993. Surpluses during the early Clinton years may have brought debt down to a 15 year low by 2001 but, by early 2009, it had risen again 80 per cent. Based on the 2010 US budget, total national debt will almost double in dollar terms between 2008 and 2015, to nearly 100 per cent of GDP.
To reach a debt level in peacetime that was last encountered during total war should send alarm bells ringing everywhere. It is unsustainable and will have profound economic, political and strategic consequences. It is in Britain’s interests that the problem is resolved soon.
In June 2009, the Brookings Institution assessed that the US accounted for more than a third of the growth in global consumption between 2000 and 2007. America’s spend and borrow spree supported global demand. Recession in the US has been, of course, accompanied by GDP falls in Europe and Japan. But the global economy has risen in value from $30 trillion in 2000 to $69 trillion in 2012 (a real rise of at least 55 per cent). “Too big to fail” is a risky argument to push to its extreme.
Whoever wins the White House will have to work for a consensus with Congress that Obama has conspicuously failed to achieve. He might change in a second term. Who knows? But when Americans go to the polls today, they should know that difficult times lie ahead. We all hope they get this one right.
Dr Liam Fox is a former secretary of state for defence, and Conservative MP for North Somerset.