As the US prepares for a new administration under Donald Trump, the long-term outlook for the national deficit and debt is coming into sharper focus.
At Pimco, we have already been making adjustments in response to the rising trajectory of US deficits. Specifically, we’ve been less inclined to lend to the US government at long maturities, favouring opportunities elsewhere. But the potential for some incremental improvements in near-term deficits relative to already dire expectations, could provide some modest relief to the bond market.
The Congressional Budget Office forecasts that the US debt-to-GDP ratio could exceed 200 per cent in the coming decades, primarily driven by demographic shifts. An ageing population will significantly increase healthcare costs, particularly for Medicare and Social Security, which are projected to be the main contributors to rising government spending. Both major political parties have historically avoided making substantial changes to these mandatory spending programmes, which limits the scope for meaningful budget reforms.