The impact of the US election on the fiscal deficit

As the market balances the impact of Biden and Trump on government revenue and spending, the presidential election has once again made the federal budget deficit a focus of attention. The United States has become a target of sharp criticism from the International Monetary Fund, which has harshly criticized issues such as US trade policies and deficits. The report indicates that the excessive fiscal deficit has led to a sustained increase in the ratio of public debt to GDP. The continuous expansion of trade restrictions and insufficient progress in addressing the vulnerability highlighted by bank failures in 2023 pose significant downward risks.

First, before the presidential debate, the Congressional Budget Office updated its projections of the US debt and deficit. The new estimate from the Congressional Budget Office for the fiscal year 2024 is currently $1.9 trillion, higher than the $1.6 trillion deficit released in February and the approximately $1.7 trillion deficit for 2023. Although the figure for 2024 is lower than the peak of $3 trillion during the pandemic, the $1.9 trillion level is almost equivalent to Russia's entire GDP. The World Bank set it at $2 trillion in 2023, making it the 11th largest economy in the world.

Secondly, the Congressional Budget Office of the United States stated that part of the expected increase in the deficit in 2024 is due to emergency spending to help Ukraine fight against Russia. Other emergency funding has flowed to Israel and the United States' allies in Asia. At the same time, the deficit of the United States exceeds that of other major economies such as Mexico at $1.79 trillion, Australia at $1.72 trillion, and South Korea at $1.71 trillion. At present, the financial market mainly focuses on inflation data and when the Federal Reserve will cut interest rates. But this does not mean that there is no risk of deficits and expanding debt.

In addition, the International Monetary Fund has stated that long-term deficits will lead to a debt to GDP ratio of 140% by 2032. According to estimates from the United States, by 2034, national debt will expand to $56.9 trillion, a significant increase from forecasts. In the era of high interest rates, the alarm for fiscal stability has begun to ring, as Washington will need to repay its debt at high borrowing costs, and some heavyweight figures on Wall Street have issued warnings of the ultimate consequences.

To address this issue, policymakers at the International Monetary Fund are increasing the efficiency of discretionary spending and raising indirect and income taxes, including taxes on individuals with annual income below $400000. The report states that these measures have brought completely avoidable systemic risks to the US and global economy. Institutional changes should be designed to ensure that once funding is approved, the debt ceiling will automatically increase accordingly.

But the threat to financial stability goes beyond that, and there is a lack of concrete action to strengthen the security of US banks, especially considering the brief crisis caused by the collapse of Silicon Valley banks in 2023. The International Monetary Fund has stated that the United States needs to implement stricter banking regulations and reduce the size of uninsured deposits. Although the fund also suggests that the United States needs to implement the Basel III regulatory agreements to achieve this goal, the proposal has not been widely welcomed in the industry.

In general, if the bond market begins to hesitate to buy US treasury bond, interest rates will rise to attract more demand, which will lead the government to pay more debt servicing costs, thus further increasing the deficit. Moreover, the demand for US treasury bond bonds in some areas of the global market has decreased, because Western sanctions against Russia have prompted other countries to diversify from dollar denominated assets. The election and its consequences may be a catalyst. Trump's allies have formulated a plan to weaken the independence of the Federal Reserve. The victory of the election may cause concern that the Federal Reserve will monetize the US debt by purchasing more treasury bond bonds and increasing inflation.