Written by Joseph Bradley.
The Congressional Budget Office’s (CBO) latest projections have set off alarms, forewarning that the trajectory of U.S. federal government debt is spiraling out of control. Last year’s debt-to-GDP ratio at a staggering 97% is expected to climb to an unprecedented 116% by 2034, surpassing even World War II levels. However, when delving into the market’s current perspective on interest rates and factoring in the potential permanence of tax cuts instituted during the Trump era, this figure ominously rises to 123%.
The Rose-Tinted Projections
Underneath the CBO’s ostensibly optimistic forecasts lie several assumptions that might be too good to be true. For starters, the assumption that Trump’s 2017 tax cuts will expire by 2025 is a hot topic of debate, with even President Joe Biden hinting at an extension. This, coupled with the anticipation of discretionary spending only keeping pace with inflation rather than GDP growth, paints a rather concerning picture for the future of America’s fiscal health.
The Political Stalemate
The Biden administration claims that its budget proposal, laden with tax hikes aimed at corporations and the affluent, will pave the way to fiscal sustainability. However, these ambitions are shackled by a Congress deeply divided along partisan lines, with neither side willing to compromise on a solution that would genuinely address the burgeoning deficit without infringing upon the benefits of major entitlement programs.
A Crisis Looming on the Horizon
History might offer us a glimpse into the potential fallout of ignoring such dire warnings. The UK’s financial turmoil under then-Prime Minister Liz Truss’s ill-fated tax cuts serves as a cautionary tale. Similarly, last summer’s Fitch Ratings downgrade of the U.S. credit rating, coupled with a spike in long-term Treasury debt issuance, momentarily drew investor attention to the ticking debt time bomb.
Variable Variables
The CBO’s projections are based on several key assumptions that are increasingly being called into question. From the optimistic view on interest rates to the unrealistic expectations on discretionary spending and the longevity of Trump’s tax cuts, there’s a growing consensus among experts and market participants that the U.S. is on an unsustainable fiscal path.
The Urgent Call for Action
Echoing the sentiments of financial heavyweights and policymakers alike, there’s an urgent need for Congress to put aside partisan differences and tackle the debt crisis head-on. The alternative—a crisis triggered by a loss of confidence in U.S. Treasury debt—could have catastrophic implications not just for America’s economy but for its standing on the global stage.
Our Take
The CBO’s latest projections are a clarion call for urgent, bipartisan action to address the looming debt crisis. The current trajectory of U.S. federal debt is not just unsustainable; it’s a clear and present danger to the nation’s economic stability and global leadership. With the debt-to-GDP ratio set to reach alarming levels in the coming years, it’s imperative that policymakers come together to forge a path toward fiscal sustainability. This will likely require tough choices, including spending cuts and tax reforms that can bridge the partisan divide and ensure the long-term health of the U.S. economy. Ignoring this ticking time bomb could result in dire consequences, jeopardizing not only America’s fiscal stability but also its ability to lead and influence on the world stage.
