A new report from the Congressional Budget Office (CBO) has found that if current laws governing taxes and spending generally remained unchanged, the federal budget deficit would increase significantly in relation to gross domestic product (GDP) over the next 30 years, the Congressional Budget Office projects.
Authored by director, Phillip Swagel, the report noted that CBO data found if Federal debt continued to increase in relation to GDP at the pace the Office projects it would under current law, that would have far-reaching implications for the nation’s fiscal and economic outlook. Such a large and growing debt would have many consequences, including:
- Borrowing costs throughout the economy would rise, reducing private investment and slowing the growth of economic output.
- Rising interest costs associated with that debt would drive up interest payments to foreign holders of US debt and thus decrease national income.
- The risk of a fiscal crisis—that is, a situation in which investors lose confidence in the value of the US government’s debt—would increase. Such a crisis would cause interest rates to rise abruptly and other disruptions to occur.
- The likelihood of other adverse outcomes would also increase. For example, expectations of higher inflation could erode confidence in the US dollar as the dominant international reserve currency.
- The United States’ fiscal position would be more vulnerable to an increase in interest rates, because the larger debt is, the more an increase in interest rates raises debt-service costs.
That could constrain some of the levers used by lawmakers via fiscal policy, which typically help them to respond to unforeseen events or to promote economic activity and strengthen national defence.
A fiscal crisis was recently seen in the UK under the Truss government, and led to investment managers holding swaps to sell off government bonds into a falling market, in order to support margin calls with cash, further driving down those bond prices in a ‘doom spiral’ that was only halted via central bank intervention.
©Markets Media Europe 2024
