MNI INTERVIEW: CBO's Swagel Sees Fiscal Headroom In Near Term

The U.S. fiscal outlook is fraught with rising risks, but the next president has enough fiscal space to take on more debt without being quickly forced into actions to avoid a crisis, director of the Congressional Budget Office, Phillip Swagel, told MNI.

"My term of art for the fiscal trajectory is 'daunting.' That's the case in the near term and over the longer term," he said, adding the fiscal year 2024 deficit is expected to come in just shy of USD2 trillion, around 6% of GDP.

"Keep in mind that the U.S. economy has come out of the pandemic. The labor market has been pretty steady. Inflation has come down. It looks like a pretty healthy economy, and yet the budget deficit is so wide."

Both presidential candidates are likely to add to the U.S. debt load through additional spending, tax cuts, or a combination of both. And while Swagel declined to comment on the specific fiscal impact of either Kamala Harris or Donald Trump's proposals, he said the U.S. has the ability to undertake policies that involve a higher deficit.

"Whoever is president next year, if they want to spend money on whatever, on social purposes, on national security, or both, or they want to extend some of the tax cuts that are expiring at the end of next year, we have the ability to do that. Of course, that will make the fiscal trajectory yet more daunting," Swagel said. "It's just over time we need to make adjustments."

FISCAL SPACE

There is no single preferred measure of debt sustainability, and the CBO, which produces independent, non-partisan analyses of economic and budgetary issues for Congress, looks at debt-to-GDP, its trajectory, and the country's debt-carrying capacity, he said. "The view here is that all of it is useful, that we want to provide policymakers with as much information as possible. There's not one measure that is the, 'Hey, this is where the yellow light turns into a red light.'"

The near term challenge is rising interest payments, expected to total around USD900 billion in 2024 before rising further into the future, he said. (See: MNI INTERVIEW: Fed Cuts Won't Change Debt Track- Ex-CBO's Hall)

Over the longer term, "the challenge just continues and gets bigger. We have deficits above 5% of GDP out into the future," he said. "As entitlement spending, Social Security and Medicare, start to inflect upwards, our deficits grow and our debt ratio grows."

The debt-to-GDP ratio, estimated at just below 100% now, is "set to rise and then really inflect upward by the end of the decade and then in the subsequent two decades of our long-term budget outlook," he said.

"In another country, this would have been a crisis already," said Swagel, whose second four-year term ends in early 2027. "Market participants believe that the U.S. will take action at some point in the future. It's the only possible explanation, because our fiscal trajectory under current law is not sustainable."

"I know the risks are rising, but I don't know how big the tipping point will be and when it will arrive," he said. "The longer we take to make the adjustment, the more the risk will rise." (See: MNI INTERVIEW: US Budget Deficit Unsustainable - Ex-CBO Chief)

ECONOMIC OUTLOOK

The U.S. economy is seeing stronger growth than the CBO had expected in previous forecasts, though momentum is expected to slow and job gains to decelerate, Swagel said.

The Federal Reserve is "nearly there" on inflation and started easing rates earlier than the CBO had assumed in its June projections, Swagel said. Long term rates are also below the CBO's assumption of an average 4.5% 10-year Treasury yield.

"It doesn't seem like there's a heightened risk of recession," he said.

The CBO has begun work on its next budget forecast, to be released early 2025, Swagel said. "It'll be a little bit better than what we had in our last update, but the basic picture of a daunting fiscal trajectory is still there," he said.