Government spending trends have great impact on the United States economy. From higher interest rates and inflation to decreasing creditor confidence, learn about these potential effects and why Americans should care about the Federal Deficit.

It’s time for President’s Insights with High Plains Farm Credit President and CEO, Kevin Swayne.

The national debt (what the federal government owes to its creditors) and government spending for various programs (defense, health care, education, social security) keeps growing. Recently, the national debt surpassed $32 trillion, which is more than the combined value of China, Japan, Germany, and the United Kingdom. There is no debt reduction in sight, as the Federal Deficit has been well above $1 trillion each of the past four years. Without a decrease in spending, the U.S. government must finance the deficit by issuing more debt.

Reducing spending is going to be painful and would impact our economy. Government spending is one of the main components of the gross domestic product (GDP), which measures the total value of goods and services produced in a country in a given period. The Committee for a Responsible Federal Budget and Congressional Budget Office reports that the current government spending as a percentage of GDP is greater than 100% and is projected to grow to 115% by 2030. To give you some perspective, the 50-year Historic Average is 47%.

Overall spending has totaled $3.9 trillion thus far in 2024. The rising national debt level in this higher interest rate environment is taking a toll on the national budget. In the first seven months of Fiscal Year 2024, spending on net interest has reached $514 billion, surpassing spending on both national defense ($498 billion) and Medicare ($465 billion). When interest on debt is your biggest bill, it should not have surprised anyone when Fitch downgraded the USA long-term credit rating to AA+ from AAA.

National debt and government spending can influence interest rates in several ways. Unfortunately, we have experienced all of them recently:

If the national debt is high relative to the GDP, it can increase the demand for money in the market, as the government needs to borrow more to finance its debt. This can reduce the supply of money available for other borrowers, such as businesses and consumers, and drive-up interest rates, leading to reduced investment spending and lower economic growth.

If the government spending is high relative to the GDP, it can stimulate the economy and increase the demand for goods and services. This can raise the inflation rate, which is the general increase in the prices of goods and services over time. Higher inflation can erode the purchasing power of money and make lenders demand higher interest rates to compensate for the loss of value. Higher inflation will also lead to monetary policies aimed at restricting or cooling down the economy.

If markets perceive that national debt is unsustainable or risky, creditors may demand higher risk premiums leading to higher interest rates on government debt. Higher interest rates can increase the cost of servicing the debt and make it harder for the government to repay its obligations. This can reduce the confidence and credibility of the government and affect its credit rating.

Boasting that the U.S. economy is the best in the world is like saying “Ehhh…good enough.” In an election year, we can attend town hall meetings and hear candidates speak on critical issues. Your political affiliation should be indifferent to the issues caused by government spending and national debt. This is a United States issue that needs to be addressed. We have crossed a threshold and there may be no turning back. The sooner we figure this out, the better.

In summary, the issues of government spending and national debt are growing concerns that impact everyone. With rising interest rates, inflation, and eroding creditor confidence, it’s clear we’ve reached a critical point. These challenges need to be addressed to ensure long-term economic stability. At High Plains Farm Credit, we’re here to help you navigate the effects of government spending on your financial future. Reach out to us today to discuss how we can assist you in planning ahead.