The Piton Investment Team regularly
monitors data that reflect or indicate broader economic conditions, partly in
order to assess what investments have a better chance of success in those
conditions. One data point that often comes up in conversation about the health
of the U.S. economy is the size of the federal deficit. The Team does not have a
stance what policies the U.S. government should or should not pursue, including
about the deficit in particular, but the Team does find value in contextualizing
the current deficit in historical terms, as one tool to understand how likely
or not the deficit is to have an impact on the economy more broadly. Accordingly,
the Team has looked at some charts that contextualize both the total federal
deficit and the interest payment portion calculated as a percentage of GDP.
This chart puts the federal deficit in perspective by
measuring it against the size of the economy. The 2025 deficit was 5.82% of
GDP—far below the extraordinary deficits during World War II or COVID-19, even
though the dollar amount is large. At the same time, it is well above the
chart’s long-run average deficit of 1.55% of GDP. In 1983, the federal deficit
reached roughly 6% of GDP. The chart puts the 2025 deficit at 5.82%, remarkably
close in scale. One takeaway can be that today’s deficit is manageable in
historical scale, but still large enough to warrant attention, especially
outside a major war or recession.
The dollar amount of U.S. interest payments is
striking: the slide shows annual interest expense rising from about $508
billion in 2020 to $1.25 trillion in 2026. GDP provides useful context, though.
At 3.84% of GDP, interest expense remains below its 1991 peak of 4.99%. Still,
it is above the chart’s 3.43% historical average and well above the 2.34%
recorded in 2020. We are paying less relative to the size of the economy than
at the 1991 peak, but the recent rise is substantial.
One more note: The 1983 peak (outside of times of large-scale
crisis) of 6% of GDP (see first chart) was not the beginning of an
uninterrupted fiscal decline. Over the following years, personal computers,
software, communications technology, and eventually the internet changed how
businesses operated. The productivity gains became especially powerful after
1995, helping drive faster growth, rising incomes, a strong stock market, and
higher tax receipts. By fiscal year 1998, the federal budget had moved into
surplus, and those surpluses continued through 2001. That history gives reason
to take today’s technological advances seriously. If AI, automation, and other
innovations lift productivity across the economy, they could expand GDP and
federal revenues and make the deficit more manageable relative to the economy. One
historical lesson is the potential of sustained growth, not a promise that
technology alone, will balance the budget. The late-1990s surpluses also
benefited from lower defense spending after the Cold War, fiscal decisions, and
a temporary surge in capital-gains tax receipts. Today’s interest and spending
obligations are different, so stronger growth would need to be accompanied by
fiscal discipline to produce a similar outcome.
Whatever the trajectory of the current deficit and its
consequences, the Piton Investment Team remains committed to pursuing
investments that will benefit clients.