Research & Investment Strategy

The US’s dangerous deficits: Part one - Public finances

Key points

  • US President Donald Trump’s fiscal loosening adds to an already elevated outlook for the US public deficit reflecting the effects of an ageing population.
  • The US deficit should average just under 5% of GDP over the coming decade. This would see Federal debt rise from 77% of GDP to 96% by 2028.
  • This outlook is extreme, both by historic US and international standards. It also assumes the timely expiry of ‘temporary’ tax cuts. And makes no allowance for any economic downturn, which we consider to be unrealistically optimistic over the next decade.
  • The increase in debt threatens the pace of future economic growth. Several studies suggest that rising debt results in headwinds to activity, perhaps up to 0.8 percentage points.
  • It also suggests modest additional upward pressure on bond yields particularly the term premia element, of around 30 basis points.
  • This combination threatens to push the US towards the point where interest payments (as a proportion of GDP) could start to rise, even if other aspects of the budget were in balance. 
  • US political concerns over government debt have receded from their apogee earlier this decade. But a desire for fiscal rectitude is likely to return, either before, or during an economic downturn that would exacerbate the deteriorating outlook.  

Exploring US indebtedness

Even as the US economy looks set to match its fastest rate of expansion since the Global Financial Crisis (GFC), concerns are mounting about its indebtedness and the outlook for the economic cycle. In a series of papers over the coming months, we will conduct a detailed breakdown of the shifting composition of US debt and its outlook, before considering the implications for financial markets.

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