Goldman Sachs Group updated its long-term US fiscal outlook on Wednesday, and it is expected that a key indicator of debt sustainability will rise to historic extreme levels.
Goldman Sachs economists Manuel Abecasis (Manuel Abecasis) and David Mericle (David Mericle) wrote in a note to clients: “Over the past five years, the prospects for US fiscal sustainability have become more challenging.” “In particular, expectations of future increases in interest rates have greatly worsened the trajectory of the ratio of debt to GDP, as well as actual interest expenditure as a share of gross domestic product (GDP).”
US Treasury Secretary Janet Yellen (Janet Yellen) has repeatedly used inflation-adjusted net interest payments as a proportion of GDP as a major measure of debt sustainability. She said in an interview last year that the 1% interest rate “is absolutely no problem, nothing to worry about.”
Goldman Sachs's latest forecast shows this ratio will steadily rise to 2.3% by 2034. Five years ago, the bank's forecast was 1.5%. Harvard economist Jason Furman (Jason Furman) and former finance secretary Lawrence Summers (Lawrence Summers) argued in a 2020 paper that policymakers should keep actual net interest rates below 2% of GDP.
Since the beginning of 2022, US interest rates have soared after the Federal Reserve (Fed) adopted the most aggressive monetary tightening action in decades to contain inflation. At the end of April, the average interest rate on US Treasury outstanding notes and bonds was 3.3%, up from 1.4% in January 2022.
The Goldman Sachs team also predicted that by 2034, the ratio of US debt to GDP will rise from the current 98% to 130%.
The team said that the basic fiscal deficit, which does not take into account interest costs on debt, currently accounts for about 5% higher than the typical level during a period of full employment, which highlights the unusual nature of the current budget situation.
Abecasis and Mericle said, “The current fiscal trajectory may eventually push the ratio of debt to GDP to a certain level. To stabilize the ratio of debt to GDP, a fiscal surplus is needed to reach a scale rare in history.” “Although the US currently has the conditions for fiscal consolidation, there is little political motivation to reduce the deficit.”