After several years of the deficit shrinking, higher government spending is expected to increase federal budget deficits and debt. As a result, some worry the debt is too big or could trigger another financial crisis. We don’t think either is true.
The total U.S. debt has reached $21.5 trillion, including about $5.7 trillion the government owes itself. While the numbers are large, remember the U.S. is a large, wealthy country and can afford it. National income is also more than $20 trillion, but a more useful comparison is to the net wealth of the country, which rose to a record $109 trillion at the end of 2018.
We don’t think the debt is likely to become a worrisome issue for financial markets unless Congress delays raising the debt ceiling, which has been suspended until 2020. But the debt is essentially the sum of past deficits, and deficits are projected to grow rapidly. Many people worry that we can’t afford our federal debt, but we feel we can. Here’s why:
The tax cuts enacted at the end of 2017 and the early 2018 budget agreement were designed to boost economic growth, but even with that impact, federal deficits are likely to rise quickly. That’s why we think eventually the U.S. will address its rising debt and deficit through a combination of tax increases and benefit cuts, but if the past is a guide, only when it has to – and that mix of increases and cuts is impossible to guess. While many are enjoying the recent tax cuts today, be prepared to pay more for benefits such as Medicare, as well as the possible impact of higher taxes. We think it makes sense to consider tax-advantaged and tax-deferred investments such as:
Don’t let concerns about the government’s finances keep you from making important decisions that affect your financial future. You may need to:
As federal deficits and the debt rise over the next few years, calls to address them are likely to become louder. That’s why we think it’s smart to consider the possibility of higher taxes and/or fewer benefits ahead, even though changes aren’t likely for several years. Your financial strategy needs to address longer-term trends and possibilities as well as the short-term positive benefits of tax cuts and higher federal spending.
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