US deficit to soar to $2.6tn in 10 years, says congressional watchdog

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The US’s budget deficit is set to soar by almost two-thirds over the next 10 years, from $1.6tn to $2.6tn, Congress’s independent fiscal watchdog has warned, as higher interest rates weigh on the government’s finances.

The Congressional Budget Office said on Wednesday that interest payments on US government debt would account for about three-quarters of the rise in the deficit between now and 2034.

The deficit’s share as a proportion of gross domestic product would increase from 5.6 per cent in 2024 to 6.1 per cent in 10 years’ time, due to the debt-servicing costs, remaining well above the average of 3.7 per cent over the past 50 years, the CBO said.

The projections highlight the mounting fiscal challenges facing governments around the world that spent heavily to prop up economies during the Covid-19 pandemic but are now grappling with much higher interest rates as they repay their debts.

The Federal Reserve raised interest rates by 525 basis points between the spring of 2022 and the summer of 2023 to a 23-year high of 5.25-5.5 per cent to counter the worst bout of inflation for a generation. The Fed’s actions pushed up yields on US Treasuries, raising the government’s cost of borrowing.

The widening deficit — the amount by which government spending exceeds revenue — led rating agency Fitch to strip the US of its triple A rating in August, saying that the country’s fiscal predicament meant its debt burden would far exceed levels seen in other nations that held its top rating.

The CBO on Wednesday said the US’s total public debt burden would rise above 100 per cent of GDP in 2025 and was expected to be about 116 per cent of GDP by 2034.

While the dollar’s status as the global reserve currency means US Treasuries remain attractive assets, the surge in spending and deficits has also concerned more moderate US economists, along with multilateral bodies such as the IMF.

Economists are worried that neither of the likely US presidential candidates, Joe Biden and Donald Trump, are talking of raising taxes to close a widening gap between what the government spends and receives. The fractious nature of the debate over the US’s debt ceiling, with the federal government at risk of shutdowns, has also triggered concerns.

The CBO said the scale of the 2024 deficit was smaller than it previously projected in May, following passage of legislation explicitly designed to rein in spending this year.

Jason Furman, an economist at Harvard University, said the CBO “confirms what we all knew, which is that the [US government] debt is on an unsustainable course. But they also show that the adjustments to get it into a sustainable course aren’t as large as we thought before seeing the latest projections.”

However, interest rates were expected to be higher than anticipated in the May projections between now and 2027, raising the government’s cost of borrowing.

Phillip Swagel, the CBO’s director, said that while in 2024 the government’s net interest costs were similar to the amount the authorities spent on defence, they would be “roughly one and a half times larger . . . at $1.6tn” in 10 years’ time.