In March, Phillip Swagel, director of the US Congress’s independent fiscal watchdog, told the Financial Times that America risked a Liz Truss-style market shock with its soaring debt pile. His reference to the former British prime minister’s “mini” Budget in September 2022 — which led to a sudden surge in UK government bond yields and ructions across financial markets — was an attempt to fend off complacency, rather than a warning of imminent implosion.
Swagel is right to sound the alarm. America’s debt is on an unsustainable path. The Congressional Budget Office projects America’s debt-to-GDP ratio will surpass its second world war high of 106 per cent by the end of the decade, and keep rising. The total deficit is forecast to average 5.5 per cent of GDP until 2030 — about 2 percentage points higher than the post-1940 mean. Net interest payments, which are currently around 3 per cent of GDP, are expected to keep creeping upward too.
Politics is an aggravating factor. Both the Democrats and Republicans heed the importance of fiscal responsibility in theory, but neither is prepared to tighten belts, particularly in an election year. Joe Biden proposed a $7.3tn budget plan for 2025. His presidential rival, Donald Trump, has vowed to renew tax cuts enacted during his time in the White House, which could add another $5tn to the nation’s debt, according to the Committee for a Responsible Federal Budget, a think-tank.