Latest news with #publicdebt
Telegraph
2 days 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.
CTV News
3 days ago
- Business
- CTV News
Federal government posts $43 billion deficit between April '24 and March
The Peace Tower on Parliament Hill is pictured from the West Gate in Ottawa on Monday, May 6, 2024. THE CANADIAN PRESS/Sean Kilpatrick The federal government says it ran a budgetary deficit of $43.2 billion between April 2024 and this past March. The deficit compared with $50.9 billion for the same stretch in the 2023-2024 fiscal year. According to the Finance Department's monthly fiscal monitor, revenue for the 10-month period totalled $494.8 billion, up from $444.8 billion a year earlier. Program expenses excluding net actuarial losses amounted to $480.3 billion, up from $440.6 billion, boosted by increases across all major categories. Public debt charges totalled $53.7 billion, up from $47.5 billion. Net actuarial losses were $4.02 billion, down from $7.56 billion a year earlier. This report by The Canadian Press was first published May 30, 2025.
Bloomberg
4 days ago
- Business
- Bloomberg
DOGE Has Failed to Halt Increases in Federal Spending
Amid the layoffs, canceled programs and other cutbacks in Washington since Donald Trump moved back into the White House in January, one thing hasn't changed: Federal spending has just kept going up. Spending since Jan. 21 is up 8.7% over the equivalent period in 2024, 7.2% over 2023. Some kinds of federal spending are irregular and intermittent, and any comparison like this can be affected by the timing of payments, but the Congressional Budget Office's latest monthly budget review made adjustments for timing shifts and estimated that spending in the 2025 fiscal year, which began in October, was up 7% through April over the same period a year earlier. The increase appears to be real. What's driving it? The Daily Treasury Statement from which these numbers are derived breaks down what it calls 'withdrawals' into 102 categories, one of which — public debt cash redemptions — is excluded here because it's not really spending. 1 I've consolidated the other 101 here into cabinet departments plus a few agencies and programs with large spending changes relative to the equivalent period last year.
Telegraph
6 days ago
- Business
- Telegraph
Write off Donald Trump's growth fantasies at your peril
Economic growth – that much sought-after elixir that, given time, solves most ills. Ever since the financial crisis it's been in short supply, but that hasn't stopped President Trump and his supporters thinking they can buck the trend. Trump's 'big, beautiful bill' is predicated on the idea his policies are capable of boosting economic growth to 3pc-plus per annum out into the indefinite future. Up until the pandemic derailed him, Trump's first presidency did indeed see growth of close to that – 2.8pc on average for the first three years to be precise. To his mind, this makes 3pc easily achievable. His policies worked the first time, and they'll work even better second time around, his economic advisers insist. Jason Smith, the Republican chairman of the House Ways and Means Committee, maintains that Trump's bill will boost short-run real GDP by 4.2pc to 5.2pc, and long-run real GDP by 2.9pc to 3.5pc. If this were to be the case, it would stabilise US public indebtedness at current levels, and probably over time start to erode it, rendering obsolete all those blood-curdling warnings about imminent fiscal ruin. So how credible are these growth objectives? On the face of it, not very. What they do highlight, however, is the complete absence of such ambition on this side of the pond, where almost any level of growth, however miserable, is thought to be a reason for celebration. Time and again, the US proves itself a dynamo of economic growth, and routinely manages to outperform its European peers. Even so, it has never before achieved 3pc per annum growth over a sustained 10-year period – at least in the post-war era. And hardly anyone outside the administration thinks that this is remotely possible in future. What's more, in macro-economic terms, the 'big, beautiful bill' is very unlikely in itself to generate much if any growth relative to where we are at the moment. This is because the intended tax cuts merely make permanent the existing tax cuts dating back to Trump's first presidency, rendering them fiscally neutral. The bill also shaves a bit off spending, so arguably could be regarded as slightly contractionary. The notion that it is hugely expansionary derives from the assumption that in practice the revenues generated will continue to fall well short of federal spending, requiring the administration to run exceptionally large budget deficits on an ongoing basis. However, if US growth accelerates to 3pc a year or more, then the magic begins to work, and the deficit falls to manageable levels. It would be nice if others shared this optimism. But they don't. Goldman Sachs reflects the consensus in anticipating an overall negative impact on growth when spending cuts, tariffs and changes to immigration are layered on top of the pro-growth policies, including the tax cuts, the 'drill, baby, drill' loosening on oil and gas development, and other deregulatory initiatives. Mr Trump scarcely needs any advice from Liz Truss, a failed former UK prime minister, but just in case he should think it useful, she's been airing her views in the Washington Post. 'I know that what Trump is attempting to do won't be easy', she wrote last week in an opinion piece. 'Back in 2022 – when I became British prime minister – I sought to go for growth by taking on the economic orthodoxy that had presided over the United Kingdom's stagnation. 'I wasn't targeted just by the usual British suspects, such as our Office for Budget Responsibility and the Financial Times, but by the entire Davos elite, from the International Monetary Fund to Biden himself. 'And just as they've tried to do with Trump, the naysayers pointed to short-term market reactions to bully policymakers out of securing long-term economic prosperity. '[Trump] must also act to take on the globalist economic establishment through alternative networks and forums to those employed by the very elite who have brought about so much ruin.' By 'elites' she seems to mean mainly the bond market vigilantes who act as a restraining force on the natural tendency of politicians to cut taxes if they can while at the same time spending like drunken sailors on shore leave. As for the rest of the 'elites', they like tax cuts as much as the next person, and I've yet to come across a business leader who at least philosophically isn't in favour of root-and-branch deregulation. So beyond 'they are all out to get me' paranoia, it's hard to see what Ms Truss is still fulminating about. If Trump fails, it won't be the elites that destroy him, but his own hubris. That said, I wouldn't altogether discount the possibility of success. Growth in output is influenced by two factors: the number of hours worked and the amount of output achieved per hour worked (productivity). Since the US president is determined to come down hard on immigration, population growth is not, on the face of it, going to provide much support for national income under his administration. But if he succeeds in bringing manufacturing back to America, it ought to be strongly supportive of productivity growth. High levels of automation in today's manufacturing mean that ironically it's unlikely to provide many more jobs. Yet if his protectionist strategy is successful in revitalising American industry, it ought to boost both investment and productivity. The other reason for believing Trump's growth aspirations may not be quite as fantastical as they seem is our new friend artificial intelligence (AI). Alright – so there is admittedly good reason for scepticism about the supposedly transformative powers of AI. But it would indeed be a major disappointment if the effects on productivity were not at least as big as the IT revolution of the 1990s and early 2000s. Productivity growth across major advanced economies slowed considerably from the early 1970s onwards as the economic miracle of the post-war period began to fade. Yet between 1995 and 2003, productivity growth more than doubled again to a rate that was comparable to its fast pace before 1973. Most analysis concludes that this acceleration was caused mainly by the production and use of IT. By the mid-2000s, however, most of the low-hanging fruit of IT-based innovation had been plucked, and productivity growth slumped back to the torpid rates we see today. AI promises to fire up the productivity growth engine anew, and there is not much doubt about where these effects will be initially and most powerfully felt. America is already streets ahead of almost everywhere else in terms of both rolling out the hyperscaler infrastructure needed to power AI and its application to business, government and household efficiency. Hope is not a strategy, it is often said, and for any mature, advanced economy, sustainable 3pc growth is quite an ask. But it is not impossible, and the US is doing at least some of the things that might make it possible.
Bloomberg
6 days ago
- Business
- Bloomberg
The US Is About to Discover if Deficits Don't Matter
It's hard to think intelligently about public debt and deficits. The economics of fiscal policy is complicated and defies straightforward prescriptions. What's most striking about budget-making in Washington today, though, is not that legislators are confused about what good debt-management requires. It's that they've just stopped thinking about it. If passed by the Senate, last week's vast House budget bill would add between $3 trillion and $5 trillion to deficits over the next 10 years. Yet the plan hasn't divided the country's politicians according to whether it's fiscally reckless. Nowadays, that issue rarely comes up. All that matters is who gains and who loses from the proposed changes to taxes and spending. Whether the economy is heading for fiscal breakdown isn't Washington's concern.
