Latest news with #fiscalpolicy
Telegraph
an hour ago
- Business
- Telegraph
Politicians got used to cheap money. Now they're paying the price
Almost without exception, governments in advanced economies face an uneasy combination of high public debt and growth rates that are far too slow to fund rising public spending without resorting to even more borrowing or further anti-growth tax increases. Set against these serious policy challenges, it is no wonder that the surge in government borrowing costs that followed the gas-related inflation spike in 2022 has become a major source of concern for financial markets. In the UK and the US, 10-year government borrowing costs – a key market benchmark – have fluctuated in the 4pc-5pc range since the start of the year. Whenever borrowing costs edge towards 5pc, genuine panic seems to take hold. The commonly held view is that higher benchmark interest rates are a temporary issue that will disappear once inflation is under control, or that they are mostly a symptom of fiscal sustainability worries and can be resolved with sufficient budget discipline. But this is wrong. I am not arguing that governments and central banks should not take serious measures to improve policy discipline. Quite the opposite – this matters more than ever. Instead, my point is that even if we achieved both monetary and fiscal sustainability across the advanced world, my guess is that interest rates would fall only slightly. Why? Because the global economic forces that pushed interest rates to rock-bottom levels for more than a decade after the global financial crisis have gone into reverse. First, the global balance of savings and investment has shifted to a state that more closely resembles the pre-2008 era. In the wake of the crisis, demand for borrowing in Western economies collapsed. Along with a global rush to safety and excess savings in places like China, Japan and Germany, lower interest rates were required to balance global saving and investment. But Western debt demand is less depressed today, and the global savings glut is shrinking. In turn, the interest rates that balance these markets have risen. Second, global trade is flowing less freely as trade barriers increase and the geopolitical order fragments. US isolationism, the war in Ukraine and trouble in the Middle East put upward pressure on goods prices and increase the threat of conflict-related commodity price shocks. These inflation fears are reflected in interest rates. Third, a decades-long global demographic tailwind has turned into a headwind that will only worsen over time. As societies age, labour shortages push up wage costs and structural inflationary pressures. Fourth, with the return of inflation and the rise in global interest rates, central banks have ended their massive purchases of government debt — or quantitative easing (QE). In some cases, including the UK, central banks have been actively selling off their government debt portfolios. During the financial crisis, the argument against bailing out institutions was that it would foster moral hazard. Banks, betting on future bailouts, would take on much more risk than they otherwise would if they had to bear responsibility for their decisions. This rationale was partly behind the tragic decision to allow Lehman Brothers to fail. But, in a strange twist of fate, it was governments themselves that fell prey to moral hazard. We knew back in 2008 that government debt was at risk of spiralling out of control and that excessive deficits needed to be curtailed. That is why the UK and US both embarked on belt-tightening once the recession ended, and why parts of peripheral Europe were forced to endure excruciating austerity. But after a while, those fears about fiscal sustainability faded as structural forces drove down government borrowing costs and QE tranquillised bond investors. By the time Covid hit in 2020 – when borrowing costs reached their nadir and governments had convinced themselves that inflation would never return, and that interest rates would stay low forever – they had no misgivings whatsoever about ramping up borrowing. A German economist named Rüdiger Dornbusch, who spent most of his career in the US, said: 'Crises take longer to arrive than you can possibly imagine, but when they do come, they happen faster than you can possibly imagine.' This roughly captures the story of fiscal policy in advanced economies over the past two decades. After interest rates stayed low for much longer than anyone imagined, they normalised faster than anyone thought they could. The maths behind massive debt-financed green transitions, generous welfare states and rising defence spending – all while financing rising state pension costs and increased public healthcare demands – never really added up. But the era of ultra-low interest rates allowed policymakers to kick any hard policy choices into the long grass. Not any more.
Bloomberg
11 hours ago
- Business
- Bloomberg
Moody's Cuts Brazil Outlook, Delivering Fiscal Warning to Lula
By , Giovanna Bellotti Azevedo, and Martha Viotti Beck Updated on Save Moody's Ratings lowered Brazil 's credit outlook to stable from positive, delivering a reproof to President Luiz Inacio Lula da Silva's government at a time when it is under increasing pressure to shore up the country's fiscal situation. The ratings firm, which upgraded the country in October, reaffirmed its Ba1 rating, one level below investment grade. But it cited expectations of larger fiscal deficits, slower progress in structural reforms and budget pressure from high interest rates to alter its overall outlook for Latin America's largest economy on Friday.
Reuters
13 hours ago
- Business
- Reuters
Moody's changes Brazil's outlook to stable from positive, affirms Ba1 ratings
SAO PAULO, May 30 (Reuters) - Moody's Ratings on Friday changed its outlook on Brazil to stable from positive while affirming its Ba1 ratings, citing a deterioration in debt affordability and "slower-than-expected progress in addressing spending rigidity and building credibility around fiscal policy."
Forbes
15 hours ago
- Business
- Forbes
Reconciliation: How A Deficit Control Tool Adds Fuel To The Debt Fire
Much like the broader U.S. budget process, a legislative procedure currently being used to advance Republican policy priorities such as tax cuts and increased spending on border security has evolved to a point where it no longer serves its intended purpose. The One Big Beautiful Bill Act, now before Congress, is being considered using a budgetary tool known as reconciliation, which was designed to expedite passage of deficit-reducing measures. While the 1974 law establishing the procedure did not strictly limit the use of reconciliation to deficit reduction, the overarching goal of that legislation was to equip Congress with stronger tools to adopt responsible budgets. Unfortunately, the present application of reconciliation is threatening to do just the opposite, increasing the national debt by trillions over the next decade. The term 'reconciliation' refers to a unique component of the congressional budget process. While often contentious, current budgetary procedures once found success because elected officials were committed to adhering to statutory budget rules and possessed the political will to elevate governance and the country's fiscal well-being above other considerations. The budgetary surpluses achieved between 1998 and 2001 were, at least in part, a product of that more disciplined approach. Federal budgeting is designed to begin with the president submitting a funding request to Congress, followed in short order by the development of an intra-legislative branch budget resolution. Though lacking the force of law, this resolution serves as a fiscal blueprint guiding broad spending, revenue, and debt levels for the upcoming year. While not required, the resolution can include reconciliation instructions directing action from congressional committees responsible for mandatory programs and revenues. (Annual appropriations matters are typically considered separately.) Those committees are typically tasked with developing proposals to generate program savings or higher revenues for activities under their purview. Essentially, they are instructed to craft legislation that, if enacted, would reconcile spending and revenue levels with the budget resolution's targets. Once such legislative language is developed, a reconciliation bill is introduced and makes its way through the legislative process. Reconciliation measures benefit from expedited consideration, requiring a simple majority for passage, unlike the regular process which demands 60 votes to overcome a filibuster in the Senate. Reconciliation Process Congressional Research Service Given the relative ease of passing legislation through reconciliation, it has evolved to become an end-run around regular legislative order. Concern about how the procedures might be used dates back to the adoption of the Byrd Rule in 1985. That rule restricted the inclusion of 'extraneous' provisions—those lacking significant fiscal impact—in reconciliation bills. From its inception in 1974 until the end of the 20th century, reconciliation had been used to reduce deficits. While policy objectives such as welfare reform were accomplished using reconciliation, such legislation was expected to result in fiscal savings. That changed in the 21st century when reconciliation began to be used to expedite the passage of legislation that, while having fiscal impacts, would increase deficits. Prime examples include the tax cuts enacted through reconciliation in 2001 (though the intent then was to reduce forecast surpluses rather than increase deficits), 2003, and 2017, as well as the 2021 American Rescue Plan Act. The Inflation Reduction Act, enacted in 2022, was initially thought to be a deficit-reducing measure, though a growing body of research on the topic suggests the IRA could add to the deficit or at least generate smaller amounts of deficit reduction than expected. The evolution of reconciliation, from facilitating deficit reduction to making it easier to add to the national debt, has not followed a straight line. Congress has at times over the past 20 years tightened rules by prohibiting its use for measures that raise deficits and disallowing instructions that would increase net mandatory spending. For instance, the Conrad Rule, in effect from 2007 to 2015, sought to rein in the practice of worsening deficits through reconciliation and instead returned the procedure to its original purpose, deficit reduction. The abandonment of past constraints like the Conrad Rule has created a loophole, enabling legislators to use reconciliation to enact policies that could harm the nation's fiscal outlook, simply by demonstrating fiscal impact. Another indicator of how poorly the current budget process is faring at present is the fact that Congress is pursuing reconciliation legislation for the fiscal year that ends in four months. Reconciliation was designed to be completed before the fiscal year begins. Longer-term fiscal policies, however, are affected by the legislation making its consideration relevant for years beyond FY 2025. A key driver of the bill is a desire by some elected officials to extend certain tax reductions passed via reconciliation during the first Trump presidency, the Tax Cuts and Jobs Act of 2017. The Byrd Rule affected the content of TCJA because it does not allow reconciliation legislation to increase the deficit beyond a 10-year budget window. To comply with that requirement, key parts of the tax cut package are slated to expire at the end of 2025. Add to that a number oBudget f new Trump administration priorities, like additional tax cuts and more spending for border security and the military, coupled with an increasingly compelling need to extend the nation's debt limit, and one big bill results. Whether it's beautiful is in the eye of the beholder. Despite the built-in advantages of using reconciliation, some policymakers are also advocating a shift to a current policy baseline to assess the cost of the legislation. Arnold Ventures has made clear in several recent publications that such an approach hides the true fiscal impact on taxpayers and further undermines the U.S. fiscal position. In a previous post on I wrote about how the U.S. budget process is broken and requires considerable reform to put the nation on a sustainable fiscal path. Contrary to the intent of existing budgeting statutes like the law establishing reconciliation procedures, the legislative package now moving through Congress will cause the national debt to soar. And it will do so by leveraging a process designed to do just the opposite. Clearly, we need to rethink our broken budget process—manipulating reconciliation is hardly the only issue. Otherwise, we must reconcile ourselves to an ever-expanding national debt and the substantial risks accompanying that unstable fiscal state.
Bloomberg
a day ago
- Business
- Bloomberg
The Senate Must Scrap the Big Beautiful Budget and Start Over
Can the Senate forestall a looming fiscal breakdown? The House has passed a grossly irresponsible budget bill that threatens to add between $3 trillion and $5 trillion to public borrowing over the next 10 years, accelerating an already unsustainable accumulation of debt. Senators owe it to voters to call a halt and insist on a comprehensive reexamination of fiscal policy. Right now, this seems like demanding a miracle. Republicans in the upper chamber face the same pressures as their colleagues in the House to unite around a plan that gives something to each of their party's factions. Economic conservatives want tax relief for businesses; MAGA populists want to cut taxes for the low-paid and expand support for families with children; immigration hawks want to build a border wall and arrest more migrants; national-security hawks want to spend more on defense. And voters at large want lower taxes without compromising entitlements such as Social Security and Medicare. The answer? Do all of the above, then disguise the fiscal consequences.
