Federal Government Debt: An Accident Waiting to Happen?

Federal Government Debt: An Accident Waiting to Happen?

Jay H. Bryson, Managing Director and Acting Chief Economist February 14, 2020

Federal Government Debt

Total Public Debt Outstanding Thousands

Trillions of USD

The level of federal government debt has skyrocketed in recent years and currently exceeds $23 trillion

$25

$25 Total Public Debt Outstanding: Dec @ $23.2T

$20

$20

$15

$15

$10

$10

$5

$5

$0

$0 40

45

50

55

60

65

70

75

80

85

90

95

Source: U.S. Department of Treasury and Wells Fargo Securities, February 2020

Economics

2

00

05

10

15

Debt-to-GDP Ratio of the Federal Government

U.S. Debt Held by the Public Percent of GDP

120%

120%

Federal Debt Held by the Public: 2019 @ 79.2%

WW II

100%

The ratio of marketable debt-toGDP has climbed to its highest level since the end of the Second World War

100%

80%

80%

60%

60%

40% Civil War

40%

WW I

20%

0% 1790

20%

0% 1814

1838

1862

1886

1910

1934

1958

Source: Congressional Budget Office and Wells Fargo Securities, February 2020

Economics

3

1982

2006

Federal Government Budget Balance

Thousands

Federal Budget Surplus or Deficit Billions of USD, 12-Month Moving Sum

$1,000

$1,000

Federal Budget Balance: Dec @ -$1,022.0 Billion $500

$500

$0

The deficit has widened in recent years and currently exceeds $1 trillion

$0

-$500

-$500

-$1,000

-$1,000

-$1,500

-$1,500

-$2,000

-$2,000 70

74

78

82

86

90

94

98

02

06

Source: U.S. Department of Treasury and Wells Fargo Securities, February 2020

Economics

4

10

14

18

Federal Budget Balance as a Percent of GDP

Federal Budget: Deteriorating in an Expansion 4-Quarter Moving Sum, Percent of GDP

The deficit-to-GDP ratio is rising even though the economy is experiencing the longest expansion in the post-WWII era

4%

4%

2%

2%

0%

0%

-2%

-2%

-4%

-4%

-6%

-6%

-8%

-8%

-10%

-10% Federal Budget Balance: Q4 @ -4.7%

-12%

-12% 76

80

84

88

92

96

00

04

08

Source: U.S. Department of Treasury and Wells Fargo Securities, February 2020

Economics

5

12

16

20

Federal Spending & Revenue

Federal Spending vs. Revenue As Percent of GDP

A decline in revenues (as a percent of GDP) is the main reason why the deficit-to-GDP ratio has deteriorated recently

25%

25%

20%

20%

15%

15%

Revenue: Dec @ 16.0% Spending: Dec @ 20.7% 10%

10% 70

75

80

85

90

95

00

05

10

15

Source: U.S. Department of Commerce, U.S. Department of Treasury and Wells Fargo Securities, February 2020

Economics

6

Federal Spending Breakdown

Composition of Federal Spending (FY 2019) Other Mandatory 12.8%

Major Health Programs 25.3%

Defense Discretionary 15.2%

Entitlements account for one-half of federal spending Nondefense Discretionary 14.8%

Social Security 23.4% Net Interest 8.4%

Source: Congressional Budget Office and Wells Fargo Securities, February 2020

Economics

7

Federal Revenue Breakdown

Composition of Federal Revenue (FY 2019) Corporate Income Taxes 6.7%

Other 7.8%

Individual income taxes and payroll taxes account for the vast majority of federal revenues

Individual Income Taxes 49.6%

Payroll Taxes 35.9%

Source: Congressional Budget Office and Wells Fargo Securities, February 2020

Economics

8

Federal Spending & Revenue

U.S. Budget Gap CBO Baseline Scenario Projections, Percent of GDP 26%

26% Outlays: 2030 @ 23.4%

Forecast

Revenues: 2030 @ 18.0% 24%

24%

22%

CBO projects that the outlaysto-GDP ratio will trend higher over the next ten years

22%

Avg. Outlays 1969-2018

20%

20%

18%

18% Avg. Revenues 1969-2018

16%

16%

14%

14% 75

80

85

90

95

00

05

10

15

Source: Congressional Budget Office and Wells Fargo Securities, February 2020

Economics

9

20

25

U.S. Federal Budget Balance

U.S. Federal Budget Balance Billions of USD; Percent of GDP $1,000

6% Federal Budget Balance: FY 2019 @ -$-984.4B (Left Axis) CBO Forecast: FY 2030 @ -$1,742.3B (Left Axis) Federal Budget Balance: FY 2019 @ -4.6% (Right Axis)

$500

3%

CBO Forecast: FY 2030 @ -5.4% (Right Axis) $0

CBO projects that deficits will exceed $1 trillion per annum for at least the next ten years

0%

-$500

-3%

-$1,000

-6%

-$1,500

-9%

-$2,000

-12% 00

02

04

06

08

10

12

14

16

18

20

22

Source: Congressional Budget Office and Wells Fargo Securities, February 2020

Economics

10

24

26

28

30

U.S. Federal Spending Projection

U.S. Federal Government Outlays Percent of GDP, CBO Extended Baseline Projections 35%

35% Net Interest: 2049 @ 5.7%

30%

Other Programs: 2049 @ 7.1%

30%

Healthcare Programs: 2049 @ 9.3% Social Security: 2049 @ 6.2%

CBO projects that entitlements will account for an increasing share of federal spending in the years to come

25%

25%

20%

20%

15%

15%

10%

10%

5%

0% 2018

5%

0% 2022

2026

2030

2034

2038

Source: Congressional Budget Office and Wells Fargo Securities, February 2020

Economics

11

2042

2046

Debt Projection

U.S. Debt Held by the Public CBO Extended Baseline Projections, Percent of GDP

160%

160%

Federal Debt Held by the Public: 2049 @ 144.0% 140%

140%

120%

120% WW II

Under current legislation, the debt-to-GDP ratio of the federal government is set up rise sharply

100%

100%

80%

80%

60%

60%

40%

Civil War

WW I

20%

20%

0% 1790 1814 1838 1862 1886 1910 1934 1958 1982 2006 2030

Source: Congressional Budget Office and Wells Fargo Securities, February 2020

Economics

40%

12

0%

Government Debt

Government Debt by Country Percent of GDP

The debt-to-GDP ratio of the U.S. government is not wildly out of line with other major economies

250%

250%

200%

200%

150%

150%

100%

100%

50%

50%

0%

0% GE

UK

CA

FR

US

Source: International Monetary Fund and Wells Fargo Securities, February 2020

Economics

13

IT

JP

Ownership of Treasury Securities

Treasury Security Holdings by Sector Percent of Total Treasury Securities Outstanding as of Q3-2019

Households, 11%

Foreign, 36%

Fed, 12%

Treasury securities are widely held across different sectors

U.S. Financial Inst., 37%

Source: Federal Reserve Board and Wells Fargo Securities, February 2020

Economics

14

Other, 4%

Foreign Holders of Treasury Securities

Top Ten Foreign Holders of U.S. Treasurys Billions of USD, Holdings as of June 2018 $1,200

$1,200 Total Final Foreign Holdings: 2018 @ $5,467 Billion

$1,000

Among foreign economies, China and Japan own the most Treasury securities but other countries own significant quantities as well

$1,000

$800

$800

$600

$600

$400

$400

$200

$200

$0

$0 CH

JP

BR

IR

UK

SW

LU

TW

Source: U.S. Department of Treasury and Wells Fargo Securities, February 2020

Economics

15

HK

IN

Savings & Investment

Savings & Investment in Advanced Economies Percent of GDP

A global savings glut means that there is financing available for the U.S. federal government

26%

26%

24%

24%

22%

22%

20%

20%

18%

18% Investment: 2018 @ 21.9% Gross National Savings: 2018 @ 22.7%

16%

16% 00

02

04

06

08

10

12

14

Source: International Monetary Fund and Wells Fargo Securities, February 2020

Economics

16

16

18

Debt Comparisons

Gross Government Debt by Country Trillions of USD; Year-End Yield, 2019 $25

5% Gross Government Debt (Left Axis) 10-Year Yield (Right Axis)

The market for U.S. Treasury securities is the deepest, most liquid, most transparent financial market in the world

$20

4%

$15

3%

$10

2%

$5

1%

$0

0%

-$5

-1% US

JP

FR

IT

UK

Source: International Monetary Fund and Wells Fargo Securities, February 2020

Economics

17

GE

CA

Wells Fargo Securities Economics Group Economists & Macro Strategists

Economic Analysts

Jay H. Bryson, Acting Chief Economist

…jay.bryson@wellsfargo.com

Shannon Seery, Economic Analyst

Mark Vitner, Senior Economist

mark.vitner@wellsfargo.com

Matthew Honnold, Economic Analyst

Sam Bullard, Senior Economist

sam.bullard@wellsfargo.com

Jen Licis, Economic Analyst

Nick Bennenbroek, Macro Strategist

Hop Mathews, Economic Analyst

nicholas.bennenbroek@wellsfargo.com

Tim Quinlan, Senior Economist

tim.quinlan@wellsfargo.com

Azhar Iqbal, Econometrician

azhar.iqbal@wellsfargo.com

Sarah House, Senior Economist Charlie Dougherty, Economist Erik Nelson, Macro Strategist

shannon.seery@wellsfargo.com matthew.honnold@wellsfargo.com jennifer.licis@wellsfargo.com hop.mathews@wellsfargo.com

Administrative Assistants

sarah.house@wellsfargo.com Coren Burton, Administrative Assistant

charles.dougherty@wellsfargo.com

coren.burton@wellsfargo.com

erik.f.nelson@wellsfargo.com

Michael Pugliese, Economist

michael.d.pugliese@wellsfargo.com

Brendan McKenna, Macro Strategist

brendan.mckenna@wellsfargo.com

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Economics

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