By Kevin McNabola
Orange Board of Finance
Kevin McNabola
To the surprise of many economists and leading financial firms on Wall Street, it is fair to say that the 2023 performance of the US economy exceeded expectations. Gross domestic product finished strong with a 3.3 percent growth rate in the fourth quarter, despite experiencing the highest level of monetary tightening in over 40 years. Monetary tightening ultimately contributed to bringing inflation down from a high of 9.1 percent in June 2022 to 3.5 percent in December 2023.
The economy finished strong despite geopolitical factors, including the wars in Ukraine and Israel and three out of four of the largest commercial bank failures in US history. Consumer spending within the fourth quarter was surprisingly strong despite all the economic headwinds. According to MasterCard, from Nov. 1 to Dec. 23, US retail sales were up 3.1 percent and online sales were up 6.3 percent.
So what’s in store for 2024? Will a recession materialize? So far Fed policymakers have penciled in three rate cuts for 2024 to get inflation down to 2 percent. The markets will ultimately dictate whether future rate cuts will be needed to close the gap between nominal and real rates, with the latter factoring in the level of inflation.
How will the fiscal reality of the national debt, which now stands at $34 trillion, impact investors, banks and global investors? Will it drive the economy into a recession? It’s hard to believe, but the national debt has increased by $14 trillion dollars in just the last three years. The US Treasury has taken extraordinary measures to keep paying the government’s bills, but the well could run dry sooner than later. Debt growth continues to outpace economic growth (as measured by GDP), and has already reached 100 percent of GDP. It will reach 118 percent by the end of this decade.
Each American citizen now shoulders the burden of $100,000 per taxpayer attributed to the national debt. Unfortunately, there has not been much progress or agreement within Congress to address the need for balanced budgets. The federal budget is largely made up of mandatory entitlements, with close to 46 percent of the budget consisting just of Social Security, Medicare and Medicaid. Social Security is expected to grow to 24 percent of the budget by 2028 as an aging population pushes up the costs of both programs.
Only about one third of federal spending is labeled as discretionary, which includes defense spending. Discretionary spending requires congressional approval through annual appropriations bills. The Congressional Budget Office also expects that net interest on debt payments will account for 13 percent of spending by 2028, up from 10 percent in 2023.
When federal government spending exceeds revenue, creating a budget deficit, the US is forced to cover the gap by selling securities, such as Treasury bonds. The national debt is the accumulation of all past deficits and the interest owed on the resulting debt. Measuring the debt as a share of GDP allows for comparing the level of debt over time relative to the size of the US economy and for comparisons with other countries’ debt-to-GDP ratios.
How will the Connecticut economy fare in 2024? It is hard to believe that the state’s economy only grew 1 percent from 2017 to 2022 when you factor in real adjusted growth inflation; however, there is optimism with a 4.7 percent growth in GDP for the third quarter of 2023 that we should see continued growth for 2024, since the nation’s and Connecticut’s economies are highly integrated – particularly within financial markets.
Connecticut under Gov. Ned Lamont has also created a business-friendly environment, which has attracted businesses from other states such as New York and Massachusetts. The state is now finally on a solid fiscal trajectory, and has begun to take steps to reduce the tax burden on residents and businesses. Based on Connecticut’s solid financial results over the past six years, the governor and the legislature need to work together this year and continue implementing additional permanent reductions to the income tax and corporate and business taxes, which will ultimately attract new business investment within our state.
Connecticut is finally on the path to fiscal sustainability, so now is the perfect time to implement tax cuts and hold the line on additional spending.
Kevin McNabola is the chief financial officer for the city of Meriden and a member of the Orange Board of Finance.