(Bloomberg) -- Mamma Mia!
In five years, the U.S. government is forecast to have a bleaker debt profile than Italy, the perennial poor man of the Group of Seven industrial nations.
The U.S. debt-to-GDP ratio is projected widen to 116.9 percent by 2023 while Italy’s is seen narrowing to 116.6 percent, according to the latest data from the International Monetary Fund. The U.S. will also place ahead of both Mozambique and Burundi in terms of the weight of its fiscal burden.
The numbers put renewed focus on the U.S. deteriorating budget after the enactment in December of $1.5 trillion in tax cuts, and the passage more recently of $300 billion in new spending. President Donald Trump’s administration argues that the tax overhaul combined with deregulation will help the economy accelerate, which in turn will generate enough extra revenue to avoid any fiscal fallout.
Officials with the Federal Reserve and Congressional Budget Office are skeptical about those expectations, as they forecast long-term economic growth will fall short of expansion rates needed to fund tax cuts. The central bank’s most recent forecasts show a median estimate of 2.7 percent for this year’s expansion slowing to 2 percent in 2020, while the CBO sees GDP growth slowing from 3.3 percent this year to 1.8 percent in 2020.
Former Fed Chairman Alan Greenspan, speaking in an interview Wednesday with Tom Keene on Bloomberg Television, said lowering corporate tax rates was a good move. “The trouble, unfortunately, is it’s unfunded,” he said, adding that Republicans should have done “spending cuts first before you try to do tax cuts.”
The U.S. has been on a spending binge since the government last ran an annual budget surplus in 2001. Tax cuts not matched by cuts in spending or economic growth, the war in Iraq and the continuing battle against terrorists as well as the aftershocks of the financial crisis have expanded deficits and contributed to the national debt. Added to that is the spiraling costs of entitlement programs such as Social Security, Medicare and Medicaid, which are projected to almost double over the next decade to $4.3 trillion, as the U.S. population ages and health-care costs rise.
While Trump and congressional Republicans raised alarms about the debt and deficit when Democrat Barack Obama was president, spending hasn’t abated with the GOP in control of the White House and Congress.
Treasury Department figures last week showed the nation’s budget shortfall widened to $600 billion halfway through the current fiscal year, compared with $527 billion in the October-March period a year earlier. Spending in March totaled $420 billion, the second-highest monthly level on record. The record-high month for government outlays was a total of $429 billion in June 2017.
“This president, obviously, is not a president that’s interested in fiscal issues,” Senator Bob Corker, a Republican from Tennessee, said in Washington earlier on Wednesday. “This issue is not going to be dealt with without a strong charismatic president who really wants to take it on. This is not going to be dealt with until we have a crisis. It’s not going to happen and that’s sad. It makes me despondent."
Corker voted for the tax cuts but against the spending increase.
There’s little political incentive for lawmakers to make deep spending cuts, which would inevitably hit popular programs, while the economy is booming. In 2013, when Obama was in office, deficit reduction ranked third on the public’s list of priorities, behind the economy and jobs, according to polling by Pew Research Center. But in a January poll, reducing the budget deficit had fallen to 14th on the list, between immigration and drug addiction, according to Pew. The decline in concern crossed party lines.
White House budget director Mick Mulvaney on Wednesday pushed back against the idea the administration is fiscally irresponsible, and urged Congress to adopt deep spending cuts in Trump’s proposed 2019 budget.
Mulvaney said that the Trump budget contains “the largest proposed reform of mandatory spending in the history of budgets.” He said Congress should adopt cuts to Social Security Disability Insurance and Medicare payments for non-Medicare beneficiaries, such as paying for medical school education.
Mulvaney said the CBO’s projection of the effects of December’s tax cuts, which sees them adding $1.9 trillion to deficits over about a decade, is way off base.
He said the CBO is wrong to assume real GDP growth will not average 3 percent over the coming decade. “We’ve changed the fundamental structure of the American economy,” he said. “That’s why we think 3 percent growth is sustainable.”
As for Italy, the country’s sovereign bond yields are already well below those of U.S. Treasuries with the 10-year Italian bond yield at around 1.72 percent versus 2.85 percent for 10-year Treasuries. Italian borrowing costs are also expected to head lower in coming years as average maturities have been extended, making Italy’s debt more manageable.
©2018 Bloomberg L.P.