US: Troubling fiscal outlook in the making - Westpac

Elliot Clarke, Research Analyst at Westpac, explains that in the latest release of CBO’s analysis of the Trump administration’s tax and spending initiatives, the deficit is expected to rise from $665bn in 2017 to $804bn in 2018, then to $981 in 2019 in the baseline forecasts.

Key Quotes

“In 2020, the deficit passes $1trn and subsequently rises to $1.5trn by 2028. Relative to GDP, the deficit averages 5% of GDP from 2019. Debt held by the public consequently increases to 96% of GDP by the end of the forecast horizon, from 77% in 2017.”

“Under the alternative scenario, from 2019 the deficit would be a full percentage point of GDP higher each year (6% on average), and debt held by the public would reach 105% of GDP by 2028.”

“The reliability of any forecast depends on the validity of the underlying assumptions, in this case for GDP growth and the labour market. Overall, the April 2018 forecasts are not overly optimistic. Though the CBO’s 3.3%yr 2018 growth forecast is above both our’s and the FOMC’s, the three profiles quickly converge to trend from 2020. The CBO’s employment forecasts are also strong in the near-term then decelerate.”

“To the extent that the baseline and alternative scenarios already forecast a 20-30ppt increase in debt to GDP over the decade to 2028, there is little room for disappointing growth outcomes. To highlight how slower growth could affect the public debt burden, assuming nominal GDP growth of 3.0% from 2019 instead of 4.0% would add another 10ppts to the debt to GDP ratio under both scenarios – taking them to 106% and 116% respectively.”