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Updated 10:58 21/04/18

US annual budget deficit to hit $1 trillion

Liam Sheasby

By Liam Sheasby, News Editor

11 Apr 2018

The United States will reach an annual budget deficit of $1 trillion by 2020, according to a new report from the Congressional Budget Office. The non-partisan organisation produces annual reports on the state of the US economy and forecasts for the future but re-released updated predictions to account for the $1.3 trillion government spending bill and the $1.5 trillion tax cuts approved by the Trump administration last year.

The CBO have predicted that the US government deficit will reach $804 billion this year – 43% greater than initially forecast. This figure is up from the $665 billion deficit in 2017, and the CBO give a figure of $981 billion by 2019. The US government currently has debts of $21 trillion, which are now predicted to rise to anywhere between $28 and $33 trillion by 2028 – up to 96% of US GDP.

Graph courtesy of the CBO press release for their latest federal debt report.

One statistic from the budget office was truly remarkable: interest costs on the government’s debt will exceed the amount of funding the government spends on the US military by 2023, and by 2028 the interest payments will be more than triple the costs of 2017.

The director of the Congressional Budget Office, Keith Hall, is to testify before both the House and Senate budget committees this week, and in a statement given with the publication of the report Mr Hall said: “Such high and rising debt would have serious negative consequences for the budget and the nation. In particular, the likelihood of a fiscal crisis in the United States would increase.”

There are positives as a result of the US government’s fiscal policies, with the CBO’s report forecasting 0.7% economic growth over the next decade, 1.1 million jobs being created during that period, and 0.9% wage growth. The report – which can be seen here – calls the latest government policies a temporary boost to the US economy however and a hindrance in the long term, suggesting debt could rise to levels comparable to the Second World War.

The deficit level isn’t the highest that the US has seen in recent years, having been at $1.4 trillion as President Obama first took office, but financial measures brought that down to just under $500 billion during his second term, and that figure has steadily risen since. It can be argued that the budget gap was always going to increase due to the ageing US population, which in turn puts pressure on things like healthcare and retirement programs, but the CBO is arguing that the latest fiscal policies have exacerbated the degree of budget gap – as pointed out by the two-year acceleration of reaching $1 trillion in deficit.

The Democrats are already arguing that this report exposes key flaws in the Trump administration’s policies, with New York Senator Chuck Schumer warning against cuts to welfare programmes as a direct response to the CBO’s warnings. In response, the Republican Chairman of the House Budget Committee, Steve Womack, said he will be "working with my colleagues in the days ahead to craft a responsible budget plan" while his colleague Jeff Duncan tweeted out this passive aggressive snippet:

Party politics aside, there are two chief concerns for the United States and investors. The first is the threat of China and the current beginnings of a trade war. The loss of trade in itself is bad, but China is America’s largest foreign creditor and could use this position of debt-holding to destabilise the US economy by demanding repayment.

The second problem is that rising deficits could drive up interest rates, which raises borrowing costs, drives down stock prices, and ultimately slows the economy down. Too much slow down causes recession and this would only serve to drive the deficit higher, but the interest rate rise is the crucial factor. Rate rises have the problem of strengthening the Dollar. This comes at a time when the administration’s policy is to pursue a weaker Dollar to rectify the US trade deficits, but the real risk is that with a stronger Dollar the government will end up paying more than $14 trillion on the treasury debt – something it cannot afford at present.

The responses to that scenario are either extensive quantitative easing, which risks hyperinflation due to the rapid influx of newly created money, or strict austerity, a policy which risks social unrest and long-term economic stagnation. Neither option is desirable, which is why it’s so crucial that the US Treasury can demonstrate it is either taking steps to limit this growth in deficit or that the US economy’s growth will be better than predicted.

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