Why More US Government Borrowing Is On the Horizon
By Charles Seville
According to January’s Treasury survey of primary dealers in US government bonds, the market expects a substantial fiscal loosening from the Trump administration next fiscal year (beginning in September 2017). At the same time, bond buyers are more uncertain than usual about the size of the deficit and the scale of new issuance. On balance, the market appears to assume a compromise between the president’s aggressive tax-cutting plans and the more hawkish fiscal stance previously set out by House Republicans. The eventual outcome will have implications for the US debt ratio and future interest burden, and potentially funding costs.
The gap between the market’s estimate for the deficit in the next fiscal year and the Congressional Budget Office’s (CBO) current-law baseline just reached the highest level in five years. That’s based on data gathered by Fitch from the January edition of the survey going back to 2010.
Every quarter, the Treasury surveys 23 primary dealers of government securities about their expectation for government borrowing in advance of a meeting of the Treasury Borrowing Advisory Committee (TBAC), which brings together market-makers and the Treasury’s debt managers. Neither the CBO baseline nor the primary dealers turn out to have had a perfect forecasting record. Neither predicted the substantial narrowing in the deficit in FY14, for example.
The January survey points to a significant widening in the deficit to $771 billion, to take the average of dealers’ forecasts. That’s a less dramatic fiscal loosening than would result from the undiluted Trump tax plan. According to a widely-cited study by the Urban-Brookings Tax Policy Center , this would lead to revenue losses of $564 billion in the first full year. By contrast, if Congress’ eventual fiscal plan resembles the Republican House budget resolution of 2015, which aimed to balance the budget within a decade, it could prove an overestimate.
Unsurprisingly, uncertainty over borrowing plans has increased. The range of primary dealers’ deficit estimates (the highest estimate as a multiple of the lowest) is the widest since the survey from first quarter-2014. The highest deficit estimate is over $1 trillion while the lowest is $ 587 billion. That compares with the fiscal year-2016 outturn of $587 billion, or 3.2% of GDP.
As to what more government borrowing means for the United States, it all depends on what the borrowing is used for. Trump’s plan is likely to lead to higher growth in the short-run, which will of course increase activity and tax revenues. Over time, however, greater borrowing could pose a problem. While the US has a high debt tolerance and unique strengths as a borrower, its level of debt is the highest among ’AAA’-rated sovereigns and the debt/GDP ratio shows little signs of stabilizing.
Seeing as both the Republican House tax plans and Trump’s plan involve cutting taxes and will result in higher government deficits, more borrowing seems to be a foregone conclusion. While the US could fund larger deficits it would leave the public finances in a weaker position, and the government more indebted, when the economic cycle turns.