The fortune tellers at Goldman Sachs have looked into their crystal balls following the Trump administration’s controversial budget and an ambitious new infrastructure plan, and concluded that things might not end so well for the U.S. economy.
The firm said on Sunday that federal deficit spending has pushed the economy toward “uncharted territory,” and that Trump and Congressional Republicans may not be able to count on the economic boost from their tax reform for much longer.
Goldman Sachs said in a note to clients that the federal deficit would reach 5.2 percent of U.S. growth by 2019, and would “continue climbing gradually from there.” –CNBC
The GOP has been counting on tax reforms delivering heavy economic stimulus – with corporate bonuses lining consumers’ pockets while investing in new areas of growth. Goldman, however, warns of diminishing returns after 2018. “The fiscal expansion should boost growth by around 0.7pp in 2018 and 0.6pp in 2019, but will likely come to an end after that” – a statement Goldman capped off with a laundry list of reasons why spending and debt would undermine the world’s largest economy.
Goldman also noted that “projected increases in mandatory spending – this includes Social Security, Medicare, Medicaid, and income support programs – are primarily responsible” for what they believe will be an unsustainable level of spending over the long term.
The Congressional Budget Office estimates that the U.S. debt/GDP ratio is currently at 77%. In three years, Goldman expects this to hit 85% of GDP if current imbalances are sustained. Last year the CBO estimated that debt/GDP might skyrocket to 150% by 2047 – and that was before the GOP reforms.
Goldman’s analysts wrote that the “growth effect comes from the change in the deficit, not the level, and further expansion would put the U.S. onto an even less sustainable long-term trend. Second, some of the recent deficit expansion relates to changes unlikely to be repeated, such as the temporarily large effect of certain tax provisions.”
Goldman also sees the GOP losing its grip on Congress after this year’s midterm election, which will at least make it “more difficult to further expand the deficit.”
The Treasury recently projected a massive increase in red government ink, announcing it would need to borrow $1 trillion this year, and more in years to come. Goldman noted that said borrowing was being conducted at “record low rates,” but this wouldn’t be the case indefinitely.
The Treasury’s need for more debt is inauspicious, given the recent surge in U.S. yields and a Federal Reserve that’s expected to begin a campaign to hike borrowing costs and withdraw liquidity. –CNBC
“We expect rising interest rates and a rising debt level to lead to a meaningful increase in interest expense,” Goldman said. “On our current projections, federal interest expense will rise to 2.3 percent of GDP by 2021,” and could hit 3.5 percent by 2027.