US: No end in sight to fiscal red ink - NBF

Krishen Rangasamy, analyst at National Bank Financial, suggests that in the US, there’s just no end in sight to budget deficits and is the message from the Congressional Budget Office (CBO).

Key Quotes

“If current laws governing spending and taxes remain unchanged, the CBO projects the budget deficit will rise to 4.7% of GDP by 2022. That, however, assumes no U.S. recession over the forecast horizon, meaning the deficit is likely to be much larger should there be another downturn ─ recall that the deficit exploded from 1% of GDP in 2007 to almost 10% of GDP two years later as the Great Recession severely dented revenues while boosting expenditures via automatic stabilizers. But you don’t even need a recession for the deficit to be larger than the CBO’s baseline projections.”

“Even small deviations from current law ─ e.g. delaying/cancelling spending cuts that are scheduled for 2020 or extending the expensing of investment ─ would lead to much larger budget deficits.”

“Such an alternative fiscal scenario, as developed by the CBO, could yield a budget deficit near 7% of GDP by 2029, again assuming no recession. In other words, the deficit as a % of GDP could easily be in double digits if there’s another economic downturn within the next decade. And if history is any guide, such fiscal red ink could be negative for the U.S. dollar.”