(Bloomberg) — Goldman Sachs Group Inc. updated its longer-term US fiscal outlook Wednesday, with its new projections seeing a key metric of debt sustainability head to historically extreme levels.
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“The outlook for US fiscal sustainability has become more challenging over the last five years,” Goldman Sachs economists Manuel Abecasis and David Mericle wrote in a note to clients. “Higher expected future interest rates in particular have substantially worsened the trajectories of the debt-to-GDP ratio and of real interest expense as a share of gross domestic product.”
Treasury Secretary Janet Yellen has repeatedly referenced net inflation-adjusted interest payments as a proportion of GDP as her main metric of debt sustainability. She said in an interview with Bloomberg last year that a rate of 1% was “absolutely fine, there’s nothing worrisome about that.”
Goldman’s updated projections have that ratio climbing steadily to 2.3% by 2034. Five years ago, the bank’s prediction was at 1.5%. Harvard University economists Jason Furman and Lawrence Summers, a former Treasury chief and paid contributor to Bloomberg TV, in a 2020 paper argued that policymakers should aim to keep real net interest from rising above 2% of GDP.
US interest rates have skyrocketed higher since early 2022 in the wake of the Federal Reserve’s most aggressive monetary tightening campaign in decades to rein in inflation. The average interest rate on the Treasury’s outstanding notes and bonds was 3.3% at the end of April, up from 1.4% in January 2022.
The Goldman team also forecast the US debt-to-GDP ratio will reach 130% by 2034, from 98% at present.
The primary fiscal deficit, which doesn’t take into account interest costs on the debt, is now some 5% greater as share of US GDP than what has been typical during times of full employment, the team said — underscoring the unusual nature of the current budget situation.
“The current fiscal trajectory could eventually push the debt-to-GDP ratio to a point where stabilizing it would require a fiscal surplus of a size that has rarely been sustained historically,” Abecasis and Mericle said. “And while the conditions for a fiscal consolidation to succeed are currently in place in the US, there is little political momentum for deficit reduction.”
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