Economics Policy & Regulation US Election Fixed Income Blog

Fiscal Futures: Gauging the Potential Impact of Post-Election US Policy

Nov 15, 2024
4 min read
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| Director—Developed Market Economic Research

We take an early look at how a new policy platform could factor into the US deficit and debt.

A key variable for investors to decipher in election season is the impact of policy proposals on fiscal spending, the deficit and debt. With the results largely tallied and the Republicans preparing to control the White House and Congress in the next government, it’s a good time for a first rough estimate.

Sizable budget deficits aren’t news in the US. And since the COVID-19 pandemic, the shortfall has been its biggest ever outside of war or recession, at roughly 6.5% of gross domestic product (GDP) today. Under current legislation, and not accounting for any post-election policy changes, the Congressional Budget Office (CBO) forecasts essentially unchanged deficits for the next decade (Display).

Current Forecast Calls for Steady US Budget Deficits Ahead
Budget Deficit as Percentage of Gross Domestic Product
US budget deficit as percentage of gross domestic product since 1962

Past performance and current forecasts do not guarantee future results.
Forecasts are from the Congressional Budget Office (CBO)
As of November 13, 2024
Source: CBO, LSEG Datastream and AllianceBernstein (AB)

Reducing the deficit requires the government to raise revenue through higher taxes or spending cuts. Tax increases are politically unpopular, and cutting spending is a challenge, given that mandatory spending on items like Social Security and Medicare rises along with an aging population. Discretionary spending has more wiggle room, but it’s only about 25% of total spending—and about half of that is on military and defense. Reducing the deficit is hard work for politicians interested in gaining or staying in office, so it should be no surprise that fiscal restraint was not a theme of the election.

As Debt Grows, More Interest Is Coming Due

As if it weren’t already hard enough to find ways to reduce the deficit, the net interest paid on the US government debt burden is climbing too. According to the federal government, total interest payments were about 2.5% of GDP in 2021; today, they’re just shy of 3.5%. We expect that bill to grow, given more debt and higher rates.

As Donald Trump prepares to take office, bond markets are fretting about the path for the deficit and overall debt burden. After every election, candidates must translate campaign platforms into policy reality, so at this point we can offer only a very rough estimate of the cost of these proposals. Looking at a few different scenarios, we can ballpark what they could mean for the US fiscal picture.

Assessing the Potential Impact on the Budget Deficit

The Committee for a Responsible Federal Budget (CRFB) estimates that from 2026 through 2035, Trump’s fiscal policy proposals would add between $1.65 trillion and $15.55 trillion to the deficit, depending on which proposed policies are eventually enacted. Their central estimate is an increase in the deficit of $7.75 trillion over 10 years. The University of Pennsylvania/Wharton budget model estimates a net impact on the primary deficit of $4.1 trillion; adding in future higher interest payments pushes this estimate close to the CRFB expectation.

Without opining on which policies will eventually be enacted, we can estimate a low-end scenario of a $1.5 trillion higher deficit, a midpoint of $7 trillion higher and a high end of $15 trillion to see what the impact on outstanding debt might be (Display). A combination of lower taxes and higher tariffs might be expected to increase growth and inflation a bit, so we can add roughly a quarter percent to the CBO’s nominal GDP projection to create our estimates. Note that we’re applying the higher deficit equally across the 10 years.

In every scenario, even with more rapid growth, the new fiscal proposals would imply a larger deficit—ranging from only marginally higher than the CBO forecast in our low-deficit scenario to the 8% annual deficit range in the central case and around 10% in the high-deficit case. Higher deficits mean a growing government debt burden above and beyond what is already baked into the fiscal cake.

Estimating the Impact of Higher Budget Deficits
US Government Debt as a Percentage of Gross Domestic Product
US government debt as a percentage of GDP forecast from 2024 through 2034

Current forecasts do not guarantee future results.
Congressional Budget Office (CBO) baseline represents projected debt levels under current fiscal policies. Scenarios represent projected debt levels under low incremental budget deficits, high incremental budget deficits and the central case.
As of November 13, 2024
Source: CBO,  Committee for a Responsible Federal Budget (CRFB) and AB

Determining the Economic Growth Needed to Hold the Debt Fort

There’s another way to think about this scenario: What level of nominal growth would it take to reduce the deficit and stabilize the debt/GDP ratio under the different fiscal scenarios?

Using our same deficit estimates but with different nominal GDP growth assumptions, 5% nominal GDP growth would be needed to stabilize things in the low scenario, 7% in the central scenario and 10% in the high scenario (Display). These are the growth rates needed to stabilize the deficit at its current level of around 6.5% of GDP; reducing it would require even more robust growth.

How Much Economic Growth Would Stabilize the US Debt Burden?
US Budget Deficit as a Percentage of Gross Domestic Product
US budget deficit as a percentage of GDP, 2024 through 2034

Current forecasts do not guarantee future results.
Represents the US budget deficit projection under the baseline and various deficit scenarios accompanied by the annualized nominal GDP growth rates required to stabilize the overall US government debt burden. Data for 2024 and beyond are estimates.
As of November 13, 2024
Source: CBO, CRFB and AB

How plausible is it for the US to deliver those growth levels? 

The current CBO forecast calls for nominal GDP (growth plus inflation) to expand at 3.8% over the next decade, roughly in line with the pre-pandemic rate. Let’s call it 4% for simplicity’s sake. Nominal GDP is running at 5% right now but declining as inflation falls. The US hasn’t averaged nominal growth of 7% over a 10-year period since the early 1990s, and the last time it averaged 10% was in the late 1970s and early 1980s. Both periods featured high inflation that elevated nominal GDP (Display).

 

Very High Nominal GDP Growth Rates Have Been Uncommon
Percentage Changes in US Gross Domestic Product
Percentage changes in US GDP since 1970—annual, 10-year rolling

Past performance does not guarantee future results.
Through November 13, 2024
Source: LSEG Datastream and AB

Bond Risk Premium Is Up—But How Much Is Enough?

It’s no wonder fixed-income markets are fretting about future fiscal policy. If the projected fiscal path comes even partially to fruition, the deficit and debt burden will rise. If, instead, nominal growth is higher, historical experience suggests that it will be primarily because inflation is higher.

This situation requires an added risk premium, which emerged in the form of higher yields on Treasuries before and in the days after the election. The “right” size of the premium depends a lot on which policies are actually enacted. The larger the deficit, the greater the risk premium will likely be.

To be clear, our estimates are based on limited policy information—there are infinite scenarios with many moving parts. For instance, a big boost in artificial intelligence productivity could accelerate real GDP growth, shaving the deficit. Tariffs and a trade war could trigger a recession, making deficit and debt metrics even worse. Or bond-market vigilantes might force Washington to limit its fiscal ambitions, making all the analysis above moot. It’s simply too early to know.

Still, as uncertain as the analysis is, we think it’s a sound starting point to think about the possible fiscal paths for the US and the effects they could have—for both the fiscal picture and markets.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Eric Winograd is a Senior Vice President and Director of Developed Market Economic Research. He joined the firm in 2017. From 2010 to 2016, Winograd was the senior economist at MKP Capital Management, a US-based diversified alternatives manager. From 2008 to 2010, he was the senior macro strategist at HSBC North America. Earlier in his career, Winograd worked at the Federal Reserve Bank of New York and the World Bank. He holds a BA (cum laude) in Asian studies from Dartmouth College and an MA in international studies from the Paul H. Nitze School of Advanced International Studies. Location: New York

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