U.S. public debt (part 2)
With the U.S. official cash rate remaining in the 5.25 per cent to 5.50 per cent range and the U.S. consumer price index rising at an annual pace of 3.3 per cent in May, it appears the U.S. Federal Reserve (Fed) will be sitting on their hands over the foreseeable future as they wait for the rate of inflation to decelerate sustainably toward two per cent.
Meanwhile, as I mentioned in my blog, U.S. public debt: an inflexion point is coming. No one knows when, forecasts for the U.S. budget deficit from the Congressional Budget Office (CBO) have proven optimistic, and after breaching U.S.$1.2 trillion in the eight months to May, the CBO has lifted its forecast for the U.S. government deficit over the 12 months to September 2024 from U.S.$1.5 trillion to U.S.$1.9 trillion, or nearly seven per cent of gross domestic product (GDP).
The U.S.$400 billion spike is attributable to military aid, student loan actions, higher outlays for Medicaid and discretionary spending, and the jump in net interest on government debt.
The cumulative budget deficit over the ten years to September 2034 has also been increased from the CBO’s February forecast by U.S.$2.1 trillion or 10.5 per cent to reach U.S.$22.1 trillion for the government debt to then exceed U.S.$50 trillion.
Compared to the past five decades, budget analysts said the U.S. deficits over the next decade “are about 70 per cent larger than their historical average when measured in relation to economic output”.
This situation reminds me of any concern slowly being strangled by too much indebtedness. government revenues relative to economic output are reasonably steady (at 17-18 per cent of GDP) but, outlays relative to economic output are trending up due to higher net interest payments on the continuing deficits and increasing government indebtedness.
For example, the government net interest expense in the year to September 2023 was U.S.$0.63 trillion or 2.4 per cent of the U.S. GDP (U.S.$26.2 trillion). Fast forward one decade from now, and net interest expense in the year to September 2034 is forecast by the CBO to hit U.S.$1.7 trillion or 4.1 per cent of GDP (of U.S.$41.4 trillion).
Whilst the government net interest expense is forecast to jump by over U.S.$1.0 trillion, it is also increasing by 1.7 per cent of GDP over the next decade, according to the CBO’s latest forecasts. When any enterprise consistently lives beyond its means, and continually growing its net indebtedness, its lenders, more often than not, eventually demand a higher risk premium.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
