Although US public debt has risen to 123% of GDP from 108% in 2019, neither presumptive Republican presidential candidate Donald Trump nor Democratic President Joe Biden has given priority to reducing it, and there is little political pressure to act.
The Wall Street Journal said that the US deficit will likely run around 6.5% of GDP this year, according to the IMF, which would tie with Japan as highest among major industrial economies.
Nonetheless, the newspaper noted that the US has several critical advantages over Europe such as robust economic growth, less adverse demographics and more room to raise taxes that are low by international standards.
Chief economist at Berenberg Bank Holger Schmieding said that the reserve status of the dollar also means that in an uncertain world, investors are more likely to buy the USs bonds than any other countrys, adding that the US gets away with unsustainable fiscal policies for longer than anyone else would.
"The last time public debt was so high relative to GDP, in the aftermath of World War II, governments were able to lower it via strong economic growth and slashed military spending. Military spending in the US fell from around 16% of GDP in the early 1950s to less than 4% today, and from over 10% to around 2% in the UK," the newspaper said.
This time, it is difficult to see which part of government spending would come down. As populations age, public spending on healthcare and pensions will trend upward.
David Miles, an official at the Office for Budget Responsibility, which provides independent analysis of UK finances, said that lower public spending might require reduced expectations about the role of the state. Those expectations have expanded significantly since the end of World War II and might not have adjusted to the reality of recent poor economic growth.
The Wall Street Journal also mentioned that this raises the risk that investors might at some point balk at buying government bonds, pushing yields much higher. In late 2022, then-UK Prime Minister Liz Truss sent bond yields surging by announcing large-scale tax cuts and borrowing, which were quickly reversed. In Italy, a government including the populist 5 Star Movement caused a surge in borrowing costs in 2018 with its ambitious spending plans, but later backed down.
Regarding inflation rates in the United States, the Financial Times said that a further decline in inflation is expected in the United States this week, which may strengthen the argument for reducing federal interest rates several times this year.
Annual consumer inflation reached 3.1% last June, a decline from 3.3 percent in the previous May.
Bureau of Labor Statistics data released Friday showed that US job growth cooled as expected last month. Such numbers could encourage the Federal Reserve to make its first reduction in borrowing costs sooner rather than later.
