Tuesday, 24 April, 2018

US Publicly Held Debt Will Match GDP In 2028

Donald Trump's tax cuts and spending increases are forecast to inflate the US deficit Donald Trump's tax cuts and spending increases are forecast to inflate the US deficit Credit Reuters
Sandy Nunez | 12 April, 2018, 00:52

According to the Congressional Budget Office (CBO), the U.S. will return to trillion-dollar annual budget deficits from 2020 onwards as the tax cuts pushed by Trump and Republicans, and higher public spending, strain America's finances.

The GOP's signature tax law is projected to increase the national debt by $1.9 trillion between 2018 and 2028, according to a new report by the Congressional Budget Office (CBO).

The CBO report said the twin tax and spending bills will push the budget deficit to $804bn this year and just under $1tn for the upcoming budget year.

The report paints an unrelentingly bleak picture of federal deficits, which would permanently breach $1tn in 2020 without action by Congress.

The annual deficit is on pace to exceed $1 trillion by 2020.

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Despite the increased debt burden, the CBO predicts the real GDP will rise to 3.3. percent in 2018 with the average growth over the next decade to be at 1.9 percent. A $1.3 trillion 2018 spending bill was approved last month with bipartisan support as a result of that deal. But in an indicator that Republicans are becoming concerned about the political liability of surging shortages, " the House will vote Thursday to a constitutional amendment to require balanced funding.

Senate Democratic Leader Chuck Schumer said the lower revenues and higher deficits resulting from the tax overhaul will prompt Republicans to call for cuts to social safety net programs such as the Social Security retirement program and the Medicare health insurance program for the elderly. That plan is widely viewed as a symbolic measure with little chance of passing Congress or winning the necessary ratification from the states.

"We expect interest rates to accelerate faster", said CBO's Hall. And if interest rates go up, the government will have to pay much more to finance the more than $14 trillion in Treasury debt held by investors. But now the Federal Reserve is raising rates, meaning the government's borrowing costs are projected to increase.

The agency notes that its projections, especially those for economic growth, however, are "more uncertain than usual this year because they incorporate estimates of the economic effects of the recent changes in fiscal policy", which are themselves uncertain. "The bigger the debt, the bigger the chances of a fiscal crisis", Hall said. Deficit hawks also predicted runaway inflation, but the growth in prices has been muted thus far.

What's more, as CBO explains, its figures very likely underestimate the size of the deficit.