Friday , 1 December 2023

Goldman Warns On U.S. Fiscal Policy: ‘We Are Heading Into Uncharted Territory’

Federal fiscal policy is entering uncharted territory [as] Congress has voted twice in the last two months to substantially expand the budget deficit despite an already elevated debt level and an economy that shows no need for additional fiscal stimulus. While most of the recent fiscal expansion has not come as a surprise to us, this nevertheless raises new questions about the plan for US fiscal policyUS fiscal policy is on an unusual course.”  says Goldman Sachs in an article entitled “What’s Wrong With Fiscal Policy?”.

The original article has been edited here for length (…) and clarity ([ ]) by – A Site For Sore Eyes & Inquisitive Minds – to provide a fast & easy read.

Here’s the projected deficit and debt-to-GDP ratio:


Here’s Goldman explaining what’s so unusual about this:

“This stands in contrast to the typical relationship between the economic cycle and the budget balance, as shown in Exhibit 2. The result is a cyclically adjusted budget balance that we project to be wider over the next few years than at any time over the last 50 years with the exception of the 2009-2012 period following the financial crisis. In our view, this gap is driven by a combination of longer-term factors as well as the recently enacted tax cuts and spending increases.”


As noted there, Goldman attributes this to a variety factors, but spending increases and the tax cuts are among the culprits.

Gary Cohn…goes on to note that interest expense is likely to rise sharply over the next eight years although Goldman does remind you that “the U.S. has historically benefited from a negative rate-growth differential, which has allowed the federal government to run a modest primary deficit on average without increasing the debt/GDP ratio.”

Goldman goes on to compare what’s going on in the U.S. to other examples of similar scenarios witnessed abroad. They have to do that because an apples-to-apples comparison isn’t possible by virtue of the fact that Goldman is “unaware of any period in the last several decades when the U.S. cyclically adjusted primary deficit expanded as we expect it to at the same time that the debt load had already been growing, as appears likely now, except for periods in or near recessions.” Here are some historical examples from around the world:


Then it gets really fun when Goldman breaks out the outlier charts. “While there are some comparable examples from the past, the U.S. looks like more of an outlier at the moment compared with other developed economies, as shown in Exhibit 10,” the bank writes. Here is Exhibit 10:


The best chart of all comes when Goldman shows you what’s about to happen in terms of interest expense relative to debt level if we stay on the current course. To wit:

The U.S. also appears to be headed into uncharted territory—at least for US fiscal policy—regarding the relationship between interest expense and the debt level.

As shown in Exhibit 11, interest expense considerably exceeded the current level during the late 1980s and early 1990s, though the debt level was moderate. By contrast, the debt level was slightly higher during and just after World War II than it is today, while the level of interest expense was similar. However, we project that, if Congress continues to extend existing policies, including the recently enacted tax and spending legislation, federal debt will slightly exceed 100% of GDP and interest expense will rise to around 3.5% of GDP, putting the U.S. in a worse fiscal position than the experience of the 1940s or 1990s.”


…This is all in the service of short-term gains at the expense of long-run sustainability.

As Goldman concludes, “overall, we now expect fiscal policy to boost growth by 0.7pp in 2018 and 0.6pp in 2019 on a Q4/Q4 basis, however, we anticipate that the growth effects will fade later in 2019 and turn slightly negative by 2020.”

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