MNI INTERVIEW: US Budget Deficit Unsustainable - Ex-CBO Chief
MNI (WASHINGTON) - The U.S. fiscal outlook is terrible under either a Harris or a Trump administration, with neither candidate showing interest in seriously tackling an underlying annual federal budget deficit running close to USD2 trillion per year, the former Director of the Congressional Budget Office Douglas Holtz-Eakin told MNI.
"The budget outlook is simple. The budget looks terrible, remains the leading unaddressed policy challenge in the United States, and no one's serious about the kinds of things necessary to get the debt growth under control," he said in an interview.
The non-partisan CBO's most recent report projects that the nation’s publicly-held debt is set to increase from 99% of gross domestic product at the end of 2024 to 122% by the end of 2034, the highest recorded.
With Donald Trump and Kamala Harris both signaling they've taken Social Security and Medicare spending off the table for cuts, the main long-run source of upward pressure on deficits is set to persist, Holtz-Eakin said.
MANDATORY SPENDING
Of the USD85 trillion the U.S. government is expected to spend over the next ten years, USD13 trillion will go to interest payments and USD21 trillion to discretionary annual appropriations from Congress, but USD51 trillion is mandatory, including USD36 trillion for Social Security and Medicare, he said.
"They are not only the largest programs, they're growing faster than anything else. Social Security grows at 5.5% a year on average the next 10 years, Medicare at 7%, and so the biggest programs are growing the fastest, and they're growing faster than revenue will plausibly grow if we get to 2% growth and 2% inflation," Holtz-Eakin said.
Lawmakers in Washington will have the opportunity to debate the fiscal situation next year even if it is unlikely the trajectory will fundamentally change, Holtz-Eakin said. The next U.S. debt-ceiling showdown is likely to come in late-summer 2025, when the government will have run out its borrowing authority following the reinstatement of the debt limit Jan 1.
The former CBO director acknowledged near-term pressures on the U.S. budget coming from interest payments on the debt, but, while the Fed should gradually lower the fed funds rate in coming quarters, it will not fundamentally alter the fiscal trajectory. "Moving a couple 100 basis points doesn't change that trajectory dramatically. It's a lot of stock of outstanding debt and that's the real problem, not the interest."
In a recent update, the CBO expected a USD1.9 trillion deficit for fiscal year 2024, the largest ever outside of the Covid era. By 2034, it foresaw deficits at 6.9% of GDP, significantly more than the 3.7% average over the past 50 years. The CBO's 10-year estimates do not include a recession over the horizon and assume Trump’s Tax Cuts and Jobs Act will expire next year. Extending those provisions would increase deficits by nearly USD5 trillion into 2034.
FED OUTLOOK
Inflation continues to slowly progress toward the Federal Reserve's 2% target and growth remains solid, Holtz-Eakin said. That means the Fed can cut interest rates in September by 25 basis points and once more by the end of the year. The market is pricing under 100 basis points worth of cuts by year-end and nearly 180 by mid-2025.
Holtz-Eakin does not expect Fed Chair Jerome Powell later this week at Jackson Hole to shed much light on the path of interest rates over the medium-term. "I think it will be quite circumscribed about going past the September meeting," he said, pointing to political uncertainties and the neutral rate. (MNI: Fed Seen Sticking To 25BP Cut In Sept Post-CPI-Ex-Staff)
"There's no question fiscal policy is doing the Fed no favors right now. We're running a USD2 trillion deficit at full employment. That makes no sense," he said. "We're going to run loose fiscal and tight monetary policies when it's usually better to do the reverse and so unless fiscal gets its house in order there's no way to change that situation where the pressure is on the Fed to keep reining in inflation."