House Republicans have recently passed a spending bill aimed at addressing the growing national debt, which is currently at an alarming $36 trillion, accounting for around 120% of the U.S. GDP.
According to analysts from Goldman Sachs, including Manuel Abecasis, David Mericle, and Alec Phillips, this bill will provide a slight reduction in the budget deficit when excluding interest payments due to increased tariff revenue.
However, they caution that the total deficit’s trajectory remains largely unchanged, particularly in light of rising borrowing costs.
The Goldman team emphasizes that despite these minor adjustments, the current fiscal path is unsustainable, given that the primary deficit is significantly larger than typical for a robust economy.
Additionally, with the debt-to-GDP ratio nearing post-World War II highs and elevated real interest rates, the expenses associated with servicing this debt are projected to escalate sharply, outpacing previous estimations.
The concern is compounded by the fact that the U.S. government is now paying more in interest on its debt than it allocates for major programs like Medicare and defense.
According to the Committee for a Responsible Federal Budget, interest payments are expected to reach $1 trillion next year, making them the second-largest government expenditure after Social Security.
Goldman Sachs warns that if the debt continues to grow unchecked, interest expenses could become exorbitant, necessitating persistent fiscal surpluses that have historically proven difficult to maintain.
Both the Trump and Biden administrations adopted a wartime-like budget approach in response to the COVID-19 pandemic, exacerbating the fiscal issues as spending did not taper off even after the economy regained full employment.
The Congressional Budget Office has estimated that the GOP spending bill passed by the House would lead to a $2.8 trillion increase in deficits over the coming decade.
While the White House and certain Republican lawmakers contend that this estimate should not factor in the anticipated costs of prolonging Trump’s 2017 tax cuts, which are due to expire, the underlying challenges to fiscal stability remain.
There is a significant uncertainty surrounding the level at which national debt becomes unsustainable, as highlighted by Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.
Goldberg supports Treasury Secretary Scott Bessent’s assertion that the U.S. has a “spending problem,” while also pointing out that tax revenues remain inadequate compared to the country’s GDP and government expenditures.
He notes that addressing these issues will require either increasing taxes, reducing spending, or a combination of both, a process that is politically fraught and complex.
Failure to address the swelling debt and rising interest rates could further exacerbate pressure on the deficit, especially as yields on long-term U.S. Treasury bonds have remained high.
Investors are left awaiting a cautious Federal Reserve’s decision to cut interest rates amid growing concerns over the deficit and potential inflation.
Moreover, any shifts in foreign demand for U.S. debt will be crucial. If trade and geopolitical tensions threaten the dollar’s status as the world’s reserve currency, the costs of borrowing may increase significantly from their current levels.
This scenario could force Congress into making increasingly difficult decisions regarding fiscal policy, with extraordinarily tough choices around spending and taxation ahead.
If inaction continues, lawmakers may ultimately face the necessity of implementing historic austerity measures to prevent a fiscal crisis, as highlighted by the Goldman Sachs analysis.
The firm warns that drastic fiscal consolidations aimed at achieving surpluses could be counterproductive if they lead to a decline in GDP, failing to reduce the debt-to-GDP ratio.
Politicians may also be tempted to resort to monetary solutions such as printing money to meet government obligations.
Historical precedents, including the Weimar Republic’s post-World War I hyperinflation, highlight the dangers of such actions, which can result in economic turmoil and social unrest.
Despite these lessons from history, the tendency of governments to overlook the ramifications of their spending and debt strategies remains a cause for concern.
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