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tax and spend

A person sits in front of a screen showing early results at the 'Black Lives Matter Plaza' near the White House during Election Day in Washington on November 3, 2020.HANNAH MCKAY/Reuters

The United States is already on a perilous fiscal path, with unending deficits forecast and the national debt headed to its highest level in the history of the republic by the end of the decade.

Whether Joe Biden or Donald Trump wins the presidency, the already poor fiscal outlook is going to get worse, heightening dangers not just for the U.S. but for Canada and other countries dependent on the U.S. economy.

In September, the Congressional Budget Office (CBO) said the U.S. deficit would reach US$3.3-trillion in 2020, more than triple the level of 2019. The federal agency said that estimated deficit – which does not include the cost of a second pandemic relief bill, still stalled in Congress – would equal 16 per cent of U.S. gross domestic product, making it the biggest shortfall by that measure since the end of the Second World War.

Next year, the U.S. deficit would decline to 8.6 per cent of GDP, still higher in relation to the economy than in all but two years between 1946 and 2019. The CBO then sees annual deficits declining through 2027 before increasing again to reach 5.3 per cent of GDP in 2030. But budget shortfalls in each of those years would be higher than the 50-year average of 3 per cent of GDP.

Those significant deficits will send the U.S. federal debt held by the public to record levels by the end of the decade, according to the CBO. By 2030, the country’s debt will equal 109 per cent of GDP, exceeding the debt burden shouldered in the aftermath of the Second World War, when the debt-to-GDP ratio hit 107 per cent in 1946. (By comparison, Canada’s Parliamentary Budget Officer projects that this country’s debt-to-GDP ratio will peak at 48.3 per cent in fiscal 2023, although that estimate does not take into account any stimulus program or other new spending that emerges from this fall’s Speech from the Throne.)

Gloomy as that projection is, it does not take into account the platform commitments of Mr. Biden or Mr. Trump. Once those are factored in, the deficit outlook is likely to worsen substantially, according to the Committee for a Responsible Federal Budget.

The non-partisan group’s analysis indicates that a Biden administration would add an additional US$5.6-trillion to the national debt by 2030 beyond CBO estimates, pushing the debt-to-GDP ratio to 125 per cent. A second Trump term would add almost as much, US$4.5-trillion, although the group cautioned that the Republican proposals lack detail and are difficult to estimate.

At the high end, a Republican administration could add US$6.85-trillion in additional debt, while a Democratic administration could add as much as US$8.3-trillion. In a more optimistic scenario, the Republicans would add an incremental US$700-billion in debt, while the Democrats would reduce debt from CBO projections by a slender US$150-billion.

Marc Goldwein, senior vice-president at the committee, said his group’s analysis shows that the U.S. is on an unsustainable fiscal path, even with interest rates at historically low levels. (By contrast, the PBO says Canada’s debt and deficit outlook is sustainable through to the middle of the decade, but only if Ottawa does not launch major new permanent spending.)

He warned that the U.S. debt will eventually reach a level that drives up inflation and increases the risk premium on U.S.-issued bonds. If that happens, Mr. Goldwein said, the fallout will not be limited to the United States, since the U.S. dollar functions as a reserve currency for the global economy. “It’s not going to be a solvency crisis, it’s going to be a global financial crisis,” he said, adding that he does not see the breaking point being reached in the next president’s term.

Even without that calamity, a large and growing U.S. deficit will affect the Canadian economy, although the immediate effects will be mostly positive, said Jeremy Kronick, assistant director of research at the C.D. Howe Institute. New pandemic spending could cost US$1.8-trillion to US$2.2-trillion, depending on whether Congress agrees to the Republican or Democratic plan. While that spending would increase the size of this year’s deficit, it would also deliver a badly needed jolt to the U.S. economy, helping Canadian exporters, Mr. Kronick said.

In the longer term, persistent U.S. deficits could increase inflation worries and act to depreciate the greenback, putting Canadian exporters at a cost disadvantage, said Trevin Stratton, chief economist for the Canadian Chamber of Commerce.

However, growing inflationary pressures may prompt the U.S. Federal Reserve to raise its benchmark interest rates, Mr. Kronick said. That would reduce the chances of depreciation in the U.S dollar – but it would increase pressure on the Bank of Canada to follow suit, he said.

Tax and Spend is a weekly series that examines the intricacies and oddities of taxation and government spending.

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