The ongoing presidential election has reignited concerns over the federal budget deficit, and the market is watching how the potential reelection of Joe Biden or Donald Trump may affect government spending and revenue.
Just before last Thursday’s presidential debate, the Congressional Budget Office (CBO) released its latest forecast for the US budget, projecting a $1.9 trillion deficit for fiscal year 2024. This is higher than the $1.7 trillion deficit reported in the previous year.
According to World Bank data, while the deficit in 2024 is lower than the peak of $3 trillion during the pandemic, it is still significant and roughly equivalent to the GDP of Russia in 2023, which is $2 trillion.
One of the reasons for the increase in the 2024 deficit is the emergency spending to support Ukraine in its conflict with Russia, as well as aid to Israel and US allies in Asia. The US deficit also exceeds that of other major economies, including Mexico, Australia, and South Korea.
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BMR warns that growing government debt threatens financial stability
Financial markets are currently more concerned with inflation trends and the Federal Reserve’s interest rate decisions. However, risks associated with the growing deficit and government debt still exist. Former President of the New York Federal Reserve Bank, Bill Dudley, warned that if the bond market is unwilling to purchase US Treasury bonds, this unsustainable fiscal trend could have adverse consequences, leading to rising interest rates and increased debt servicing costs.
Dudley also emphasized that the reduction in demand for US Treasury bonds 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 disrupt financial markets and potentially exacerbate concerns over inflation and debt.
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