Preparing CPAs to Discuss the National Debt



As our country works its way through this current crisis, history may repeat itself, and CPAs and their clients will likely hear much talk about the national debt. You may recall this occurred in the post 07/08 financial crisis years after trillions of dollars were borrowed to keep the economy moving. Today there are discussions of an additional trillion-dollar-plus stimulus package and warnings about the current and increasing national debt size. There are various  economic theories and political posturing regarding the need for large-scale borrowings and the significance of the national debt’s size and trajectory. Volumes have been written on the national debt. The following is a brief overview of the range of theories and positions CPAs and their clients might expect to hear.

On the far-right side of the spectrum is the January 2019 “H.J.Res.6 - Proposing a Balanced Budget Amendment to the Constitution of the United States” and the eight related, subsequent bills introduced through August 2020 in the House and Senate to curtail annual deficit spending. In essence, the bill requires the president to submit a balance budget each year; it prohibits total spending from exceeding total receipts, excluding the repayment of debt and receipts from borrowings; and it prohibits total annual spending from exceeding 20 percent of GDP. These provisions can be overwritten by a proposed greater than simple majority. It also requires a greater than the current simple majority to increase the national debt limit, and it gives Congress the ability to waive the requirements when a declaration of war is made, or a military conflict causes a serious imminent threat to national security. The bills have only a few sponsors, and they appear to have little traction.

On the far-left side of the spectrum is the modern monetary theory, a reemerging heterodox macroeconomic theory being advanced by a few economists. The theory generally states that, if a sovereign nation prints its currency (like the US), it can and should spend as much as it wants because it can print its own money. Risks to the theory are the known, unknown and unintended consequences. A known risk, which its followers acknowledge, is run-a-way inflation, but they offer a control mechanism through congressional action. They assume that as inflation heats up, Congress can and will work together by timeously and successfully implementing a safety valve (i.e., taxing money out of the economy). Many economists and others consider this untested theory in an economy as large, diverse, and globally significant as the US’s, the current political incentives and party divide, and they question the practicality of this as an effective safety valve, while they weigh the greater risks to the country and global economy of it not working as the theory suggests. 

In between are economists and others saying, among other things, 1) the debt is a threat to our economic and/or national security, 2) the debt is a problem but not a “today problem,” 3) the debt is a today problem, but we can’t focus on it today, 4) the trajectory of the debt is unsustainable, (which frequently appears in the audited 2019 Financial Report of the United States Government issued in February 2020 and prior years’ reports), and 5) the president’s 2021 budget submission to Congress A Budget For America’s Future, submitted in February 2020, stated: “If America’s spending and debt crisis are not addressed and lower economic growth continues, American families will see a much lower standard of living.” This budget submission was before COVID-19 was acknowledged as a full-blown national and global crisis. Since then, the GDP has declined by more than one-half trillion dollars, the speed and size of its future growth is even more questionable, and the national debt has increased by almost four trillion dollars and continues to rapidly move upward.

It is impossible to know now who, if any of them, are correct.  What we do know is the national debt of over $27 trillion is larger and growing faster than our $20 trillion GDP, and it is projected to continue to do so for the foreseeable future. Furthermore, Federal Reserve Chairman Powell recently commented that more stimulus is likely needed to help with the recovery, and now is not the right time to worry about the US’s fiscal health. Instead, that should be addressed when unemployment is low again and tax revenues are rolling in. He added that we are not going back to the old economy. Chairman Powell did not tell us when or how unemployment will become low again or when tax revenue will be rolling in more than expenditures—that remains to be seen.

One thing CPAs and their clients know is that trees do not grow to the sky. Likely, neither will the national debt!

Source: MICPA

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