The ongoing presidential election has reignited concerns over the federal budget deficit, with markets focusing on how the potential re-election of Joe Biden or Donald Trump could impact government spending and revenue.
Just before last Thursday’s presidential debate, the Congressional Budget Office (CBO) published updated forecasts for the U.S. budget, predicting a deficit of $1.9 trillion for fiscal year 2024. This forecast is larger than the previously predicted deficit of $1.6 trillion in February and higher than the $1.7 trillion deficit reported in 2023.
Although the deficit for 2024 is lower than the peak $3 trillion during the pandemic, it remains significant and is approximately equal to the entire GDP of Russia at $2 trillion as of 2023, according to the World Bank.
The increase in the deficit for 2024 is partly due to emergency expenditures to support Ukraine in its conflict with Russia, as well as aid to Israel and U.S. allies in Asia. The U.S. deficit also exceeds that of other major economies, including Mexico, Australia, and South Korea.
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BMR states that the growing government debt threatens financial stability
Currently, financial markets are more focused on inflation trends and the Federal Reserve’s decisions on interest rates. However, the risks associated with the growing deficit and national debt remain. Former New York Fed President Bill Dudley warned that such unsustainable fiscal trends could lead to adverse consequences if bond markets begin to resist buying U.S. Treasury securities, which could lead to higher interest rates and increased debt service costs.
Dudley also emphasized that reduced demand for U.S. Treasury bonds, partly due to Western sanctions against Russia, could worsen the situation. Furthermore, if the next administration attempts to interfere with the independence of the Federal Reserve, it could unsettle financial markets, potentially leading to higher inflation and concerns about the debt.
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