American Fiscal Chicanery

US Budget Deficit Overview

• The US budget deficit is projected to reach 1.92 trillion in 2024, up from 1.92 trillion in 2024, up from 1.69 trillion in 2023.
• Adjusted for timing shifts, the deficit will amount to $2.0 trillion in 2024, which is 7% of US GDP.
• This 7% deficit is the highest in peacetime outside the COVID pandemic and the Great Recession.

Economic Context

• Despite the ballooning deficit, the US economy grew by 2.5% last year, the fastest among large developed countries.
• US GDP is now 10% bigger than before the pandemic.
• Personal income tax receipts are up 35% and corporate income tax receipts are up 104% compared to the pre-pandemic period.

Federal Expenditures

• Federal expenditures have increased by 43% since 2019, compared to a 35% growth in federal receipts.
• Medicare, Medicaid, Social Security, veteran benefits, and defense make up 70% of all federal spending.
• These expenditures have increased by 40% over the past 5 years and are unlikely to slow down.

Political Implications

• The upcoming US election will shape the outlook for the deficit.
• Biden plans to end Trump tax breaks for incomes above $400,000 and raise corporate taxes.
• Trump plans to make his 2017 tax cuts permanent, which would add an additional $3.3 trillion to the national debt.

Fiscal Policy and Economic Impact

• Fiscal policy will be more expansionary under Trump, leading to higher growth and inflation.
• Higher bond yields under Trump would result in higher interest payments on America’s debt.
• Economic theory suggests high government borrowing crowds out private investment, but this has not yet happened in the US.

US Government Bond Market

• The market has absorbed a high level of Treasury issuance and unwinding of Federal Reserve holdings.
• Money market funds, US banks, and foreigners have been significant buyers of Treasury securities.
• The US Treasury has reduced the duration of its net issuance, replacing bonds with bills to manage interest rates.

Financial Engineering

• The US Treasury’s strategy of issuing short-term bills has kept long-term bond yields low.
• This financial engineering has prevented the crowding out of private investment.
• The Biden administration is using various strategies to support the economy and cap interest rates ahead of the election.