Treasury in the red: in 2020, the US budget deficit may become the highest in eight years

In fiscal year 2020, which ends September 30, the US budget deficit could reach its highest level in eight years. As expected, for the first time since 2012, US treasury spending will exceed revenues by $ 1 trillion. This is stated in the report of the Congressional Budget Office.

According to the forecast of the department, in the next ten years the budget deficit will continuously remain above the psychological mark of 4% of GDP. So, from 2020 to 2030, the indicator will increase from the current 4.6% to 5.4% of GDP. The last time a similar situation in the American economy could be observed during the Second World War.

"Over the past 100 years, the state budget deficit has never exceeded 4% of GDP for more than five consecutive years, with the exception of the six-year period during the Second World War and in the first years after it," the study said.

In many ways, the record US budget deficit is associated with high military spending, spending on social programs and emerging trade problems. About this in an interview with RT said the chief analyst of TeleTrade Peter Pushkaryov.

“Today in the United States there are huge expenses for the army, health care, various tax benefits, as well as social deductions and subsidies, without which serious disturbances can begin in American society. At the same time, the US trade deficit with almost all countries plays against the budget. Currently, the United States purchases more goods and services abroad than they supply themselves. This leads to a constant outflow of money from the country, ”said Pushkaryov.

The tax reform of Donald Trump made a significant contribution to the increase in the budget deficit, said Anton Pokatovich, chief analyst at BCS Premier.

“Tax reform has become one of the key factors that widened the gap between the growth rate of revenue and budget expenditures. So, in 2019, expenses increased by 8.3% compared to 2018, and revenues - only 4%, ”Pokatovich explained in an interview with RT.

Even during the 2016 presidential race, Trump promised to ease the tax burden on business if he wins the election. At the end of 2017, the head of the White House signed a law to reduce income tax for American companies from 35% to 21%.

The adopted measure was to become one of the drivers of economic growth. According to Trump, after tax cuts, companies would start to earn more profit, increase salaries for their employees and thereby increase economic activity in the country. At the same time, the actions of the American president did not give the expected result.

“According to Trump’s idea, tax reform was supposed to accelerate the growth rate of the economy to 3-4%. In fact, including due to trade uncertainty, the indicator barely exceeds 2%, and in the near future it may slow down even more, ”said Mikhail Kogan, head of the analytical research department of the Higher School of Financial Management, RT.

According to the analyst, for re-election for a second term, Donald Trump may announce new tax breaks for the middle class. However, such a measure risks turning into an even larger budget deficit.

Vicious circle

To cover the budget deficit, the US Treasury Department issues special treasury bonds (treasuries). American and foreign investors buy securities and receive a stable income on them. In other words, treasury holders lend their money to the American economy. These funds are used to pay off the budget deficit.

Over the past year, US government debt increased by $ 1.3 trillion to $ 23.2 trillion. So, on average, each citizen of the United States today has more than $ 70 thousand of public debt. This is evidenced by the data of the US Ministry of Finance and the portal Usdebtclock.org.

Moreover, in the long run, the growth of public debt only increases the burden on the country's budget. According to Anton Pokatovich, the need to service growing debt requires new cash injections and further exacerbates the deficit.

“The expenditure side of the US budget increases with the growth of public debt. This is due to the fact that interest payments on debt also continue to grow, ”Pokatovich explained.

Cash pumping

However, in recent years, the US economy has become more difficult to attract new funds from abroad to cover the budget deficit. According to analysts, US Treasury bonds are less and less interested in foreign investors. So, over the past year, the yield on government securities with a maturity of ten years has fallen from 2.7% to 1.6% per annum.

“To finance the budget deficit, the Treasury is actively borrowing funds in the market. However, the demand for American treasuries from foreign participants began to decline, and tension has arisen in the US money market, ”said Mikhail Kogan.

The situation was most acute in the early fall of 2019. As foreigners became less likely to buy treasuries, American banks themselves had to actively acquire government bonds. As a result, reserves of credit organizations began to gradually deplete, and in mid-September, at the height of tax payments, banks did not have enough money to buy treasury bonds. The US Federal Reserve immediately intervened in the situation. The regulator urgently printed and poured more than $ 128 billion into the financial system.

Traditionally, the Federal Reserve issues new money and buys securities on it as part of a quantitative easing program. The Fed pursued such a policy from 2008 to 2015 and in total acquired assets worth $ 3.6 trillion.

After the events in September 2019, the regulator continued to pump up the economy in dollars. An increase in the money supply in the financial system should support banks and spur economic activity in the country, but may increase inflation and put pressure on the dollar.

“Initially, it was assumed that the Fed’s actions will be temporary and will last until the end of the second quarter of 2020. However, due to the upcoming presidential election in November, the release of new money may continue on an ongoing basis. All this jeopardizes the American dollar. Although Donald Trump himself has repeatedly stated the need to weaken the national currency, in the long run, this trend may call into question the status of the dollar as a reserve currency, ”concluded Mikhail Kogan.