Does the U.S. Budget Deficit Matter? A Legal Perspective by Business Attorney Amelia Liana Sterling

The topic of the U.S. federal budget deficit is one that often flies under the radar in public debates, especially during election seasons. While much attention is given to issues like immigration, inflation, and trade, the increasing federal debt and its implications for the economy seem to take a back seat. As a business attorney at sterlinglegalservices.org, I’ve been asked numerous times about the potential risks of this growing fiscal concern. Are the fears warranted, and what does it mean for business owners and entrepreneurs? Let’s dive into this critical issue.

A Snapshot of the U.S. Budget Deficit

For the fiscal year that just ended, the Congressional Budget Office (CBO) estimates the federal budget deficit to be approximately 6.7% of GDP—an unusually high figure given that the economy is nearing full capacity and unemployment is historically low. This level of deficit is comparable only to times of economic distress, such as deep recessions or the aftermath of World War II.

Additionally, the national debt is at historically high levels, currently standing at 123.4% of GDP, down slightly from its peak during the pandemic but still a significant concern. The specific measure that concerns most economists and investors is the debt held by the public, which is forecasted to approach 99% of GDP by FY2024.

Why Should Business Owners Care?

As a business owner or entrepreneur, you may wonder why this matters to you. Government borrowing can affect private investment, particularly when the government competes with private businesses for the same pool of capital. While this has not yet resulted in an uptick in interest rates or stifled economic growth, there are risks on the horizon. If the debt continues to grow unchecked, it could eventually lead to higher borrowing costs, inflation, or even investor panic—eventualities that could threaten financial stability and affect the broader business environment.

Moreover, in extreme cases, high levels of national debt can cause a loss of confidence in government bonds. If investors fear default or inflationary consequences, they may demand higher yields on U.S. debt, leading to rising interest rates. For businesses, this could mean higher financing costs and diminished investment potential.

The Global Perspective

On the global stage, the U.S. is in a somewhat unique position. As the issuer of the world’s dominant currency, the U.S. benefits from a high demand for U.S. dollars, particularly in times of economic uncertainty. This global demand allows the U.S. to maintain higher levels of debt than other countries without facing the same level of fiscal pressure.

However, this “exorbitant privilege” has its limits. There could come a time when global investors may demand higher yields or move away from U.S. debt if the risks associated with the country’s fiscal trajectory become too apparent. While countries like Japan have been able to manage high levels of debt without dire consequences, this is not a guarantee for the U.S. indefinitely.

A Time for Action?

The long-term budgetary issues facing the U.S. are primarily driven by demographics. With an aging population, entitlement spending—particularly Social Security and Medicare—is set to rise. At the same time, the working-age population is growing more slowly, which could limit tax revenue growth.

To address this, a combination of policy adjustments may be necessary: increasing the retirement age, raising taxes, cutting benefits, or reducing other government expenditures. While none of these measures are politically easy, they are likely necessary to prevent future fiscal crises. Additionally, innovations in healthcare technology may help reduce some of the strain on government spending, but this remains uncertain.

Conclusion

So, does the U.S. budget deficit matter? Yes, but perhaps not in the immediate term. As a business attorney, I see the risks of prolonged fiscal imbalances, but it is equally important to recognize the flexibility the U.S. government enjoys due to its unique economic position. While the situation warrants attention, it may not result in immediate economic turmoil unless policy changes are delayed too long. For business owners, staying informed about fiscal policy and its potential impacts on the financial system is crucial, especially as we face a future of rising deficits and national debt.