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Closer Look at the Alarming Fiscal Health of the U.S. (Weekly Insights) Thumbnail

Closer Look at the Alarming Fiscal Health of the U.S. (Weekly Insights)

In this weekly, we offered the key takeaways from the report:

  • Congressional Budget Office puts out new 10 YR budget projections.
  • Deficit is expected to get better before it gets worse.
  • U.S. debt levels to soar.
  • Net interest costs a major burden.
  • Higher taxes, cuts to entitlements and spending to be a growing debate.

Last week the Congressional Budget Office (CBO), a non-partisan independent organization, released its 10 year projections on the federal budget. This report is full of information about sources of government revenues, outlays and the deficit. Unfortunately, the fiscal situation in the U.S. does not look to get any better as we now have information through 2034.  

  • Deficit better before it gets worse: According to the CBO, the deficit as a percentage of GDP is expected to improve from the current level of 6.2% to as low as 5.0% (in 2029) before worsening again into 2034. By 2034, the deficit is expected to be back to 6.2% of GDP. To put this in perspective, historically the deficit, on average, has been 3.2% of GDP. At 6.2% of GDP, it would put us in the same category that Hungary and Romania are currently (as of 2022).  
  • Outlays to outpace revenues: The deficit situation will be due to a 56% increase in outlays over the next 10 years and only a 51% increase in revenues, including individual and corporate income taxes.
  • Debt to surge: To fund the deficit, debt held by the public (Treasuries) is expected to rise 73% over the next 10 years. As a percentage of GDP, it is expected to rise from 97% to 116% by 2034. However, our country owes more than just our Treasury debt. We owe money to ourselves as we have borrowed from social programs. Our gross federal debt (including both) is expected to reach $54 trillion by 2034 or 131% of GDP. There are few developed countries that are in that type of debt (e.g., Japan, Greece).
  • Net interest a major issue: Net interest costs to fund the burgeoning deficit are expected to increase 87% over the next 10 years. Net interest costs are the biggest increase expected in all the government outlays. They are expected to make up 16% of government outlays, a record high and nearly double what the historical average has been since 1940 (8.8%). These estimates are factoring the average interest rate on Treasury debt to rise from 3.15% currently to 3.5% in 2034. What is more troublesome with these forecasts is that we will spend more servicing our debt than we do on our military within the next five years.
  • Overly optimistic on growth: The deficit is making optimistic predictions on economic growth from 2024-2034. They are expecting the economy to grow almost 4% per year from 2024-2034. Since 1945, the average annual growth of the U.S. economy has been ~3.0%.

The Bottom Line: 

The unnerving fiscal situation in the U.S. is not a new story.   In fact, the credit rating on U.S. debt has been downgraded twice by major rating agencies. We have been able to fund reckless government spending for decades because of the near zero interest rate policy we were lucky to have for so long. However, that is over as we enter into this new interest rate regime. While the Fed cuts interest rates as we move through different stages of the economic cycle, getting back to zero with the money printed after COVID is unlikely. There will need to be a change. We can not forecast how or who will get that done but we are on an unsustainable path. Higher taxes and cuts to entitlements and spending will likely be the growing debate over the coming years.  

© 2023 Authored by Megan Horneman, Chief Investment Officer, Verdence Capital Advisors, LLC.   Reproduction without permission is not permitted. The indexes presented are unmanaged portfolios of specified securities and do not reflect any initial or ongoing expenses nor can it be invested in directly. An investment’s portfolio may differ significantly from the securities in the index.
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