“It’s been well known for a while that the United States government was on a pretty unsustainable path with deficits,” said Jessica Riedl, a budget and tax fellow at the Brookings Institution.
“Over the last few years, the United States has moved into roughly US$2 trillion deficits, even during peace and prosperity,” she added.
While deficits of three per cent to four per cent of GDP used to worry financial markets, she noted that levels are closer to six per cent to seven per cent of GDP now.
“That has made markets more nervous,” she said.
As inflation pushed interest rates higher, interest costs on the debt have risen as well, and costs linked to an ageing population are pushing up deficits.
RISKS AHEAD
Analysts note that there is no debt-to-GDP level that automatically triggers a crisis.
Although the gross debt marks a symbolic threshold, many economists consider debt held by the public to be the most economically meaningful measure.
“But psychologically, these are the landmarks that warn financial markets that they need to take another look at rising debt,” Riedl said.
Federal borrowing surged during the Great Recession of 2007-2009 and increased following the government’s response to the downturn triggered by COVID-19, said Caleb Quakenbush, director of fiscal policy at the Bipartisan Policy Center.
But he told AFP that the trajectory of US budget spending has not been addressed by Congress or US administrations in a “meaningful or durable way”.
He warned of uncertainty surrounding the “unprecedented levels of borrowing that we’re seeing now”.
Bond markets could face steep challenges in a crisis scenario, he noted.
But even outside that situation, the United States could see higher borrowing costs for consumers and businesses, squeezing the economy.
Treasury Secretary Scott Bessent had previously set a goal of cutting the US deficit to three per cent of GDP.
