CBO Projects Rising US Deficits and Global Fiscal Tightening Challenges

CBO Projects Rising US Deficits and Global Fiscal Tightening Challenges 

Eric Peters, CIO of One River Asset Management, discussed insights from the latest report by the non-partisan Congressional Budget Office (CBO):

"The CBO estimates the 2024 deficit will be 7% of GDP, with the 2034 deficit projected at 6.9% of GDP. This implies a 7% annual growth rate over a decade, effectively doubling the amount. The CBO has updated its forecast for this year's deficit to $2 trillion, up from $1.5 trillion estimated in February.

Contributing to this revision is a new $95 billion aid package for Ukraine, Israel, and the Indo-Pacific region. Over the next ten years, this legislation will result in $900 billion in new spending, financed by debt, which the CBO projects to grow at a 3.2% rate.

This fiscal challenge is not unique to the US. The European Central Bank (ECB) has highlighted the strain on public finances in Eurozone countries due to aging populations, climate change, and increased defense spending through 2070. To address these challenges, countries need to implement fiscal tightening averaging 3% of GDP. To reduce debt to the EU's target of 60% of GDP by 2070, an additional 2% tightening is required annually, totaling 5%.

The ECB acknowledges that these simultaneous challenges are formidable, particularly for high-debt countries with high interest rates, necessitating immediate action. However, such drastic cuts are unlikely without a severe crisis, as they would risk causing a depression and the breakup of the EU.

Despite the improbability, policymakers continue to advocate for such measures. For example, Italy's parliament has passed a law enabling the devolution of fiscal powers to regional governments.

As we near the end of a multi-decade debt supercycle, expect to see a variety of self-serving strategies as nations, regions, states, and cities strive for survival."