Goldman Sachs has warned that the growing US deficit could pose a significant threat to the country's economic security during the next recession.
The bank's chief economist Jan Hatzius forecast the federal deficit to increase from $825 billion (or 4.1 percent of gross domestic product) to $1.25 trillion (5.5 percent of GDP) by 2021. The number will balloon to $2.05 trillion (seven percent of GDP) over 10 years, he said.
“An expanding deficit and debt level is likely to put upward pressure on interest rates, expanding the deficit further,” said Hatzius. “While we do not believe that the US faces a risk to its ability to borrow or repay, the rising debt level could nevertheless have three consequences long before debt sustainability becomes a major obstacle.”
The Congressional Budget Office (CBO) said in April debt could equal GDP within a decade if Congress extends the tax cuts. That’s a level not seen since World War II.
According to CBO, economic growth should jump above three percent this year thanks to the stimuli. Nevertheless, debt held by the public will soar to $28.7 trillion by the end of fiscal 2028.
“Lawmakers might hesitate to approve fiscal stimulus in the next downturn in light of the already-substantial budget deficit,” said Hatzius. “While we would expect some additional loosening of fiscal policy during the next downturn, there is a good chance in our view that it would be less aggressive than it was in the last few recessions.”
Goldman analysts’ team explained that even if the debt and deficit levels don't prevent lawmakers from approving countercyclical fiscal stimulus during the next recession, a political desire to stabilize the debt level would likely hamper growth during the next recovery. “The current fiscal expansion ... must at some point give way not just to a neutral stance, which we expect by 2020, but to a tightening of fiscal policy that could restrict growth,” Hatzius wrote.
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