The ongoing presidential election has reignited concerns about the federal budget deficit, with markets watching how the potential reelection of Joe Biden or Donald Trump could impact government spending and revenue.
Just before the presidential debate last Thursday, the Congressional Budget Office (CBO) released updated forecasts for the U.S. budget, predicting a deficit of $1.9 trillion for fiscal 2024. This forecast is higher than the earlier projected deficit of $1.6 trillion in February and exceeds the $1.7 trillion deficit reported in 2023.
While the deficit for 2024 is lower than the peak value during the pandemic of $3 trillion, it is still significant, roughly equalling the entire GDP of Russia at $2 trillion by 2023, according to the World Bank.
The increase in the deficit in 2024 is partly due to emergency spending to support Ukraine in its conflict with Russia, as well as aid to Israel and U.S. allies in Asia. The U.S. deficit exceeds that of other major economies, including Mexico, Australia, and South Korea.
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BMR indicates that growing government debt threatens financial stability.
Currently, financial markets are more focused on inflation trends and decisions by the Federal Reserve on interest rates. However, risks associated with the growing deficit and national debt persist. Former New York Fed President Bill Dudley warned that such unsustainable fiscal trends could have adverse consequences if bond markets start to shun U.S. Treasury securities, leading to higher interest rates and increased debt servicing costs.
Dudley also emphasized that reduced demand for U.S. Treasury bonds, partly 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 unsettle financial markets, potentially leading to higher inflation and debt concerns.
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