America Faces Grim Reckoning for Budgetary Profligacy — Bloomberg

Vyacheslav Dvornikov

Apr 15, 2025

Compared to everything happening in Washington, there is one trend that receives too little attention: the US is heading towards a fiscal collapse, writes Michael Bloomberg, founder of Bloomberg agency.

This is the unequivocal conclusion from the recently updated long-term forecasts of the Congressional Budget Office (CBO). The national debt could exceed the record level set after World War II (106% of GDP) in just four years, the CBO warned. Assuming no recessions, the national debt will rise to 100% of GDP this year and to 118.5% by 2035 — and it will only continue to grow. In 30 years, the national debt will exceed 200% of GDP.

In 2025, the deficit is expected to be 6.2% of GDP. The growth of the debt burden is mainly driven by spending on social security and Medicare, associated with the retirement of the baby boomer generation, as well as rising interest payments on debt servicing, according to the CBO report.

Both Democrats and Republicans oppose reducing social security benefits. Many economists argue that balancing the budget without cutting pension payments or raising taxes will be difficult, if not impossible.

Increasing revenue from import tariffs will not even come close to balancing the budget. Moreover, the impact on overall revenue is likely to be negative, as tariffs reduce business activity and job creation, Bloomberg notes.

The new CBO estimates do not include revenue losses from President-elect Donald Trump's plans to extend the expiring provisions of his 2017 tax cuts ($4.6 trillion over 10 years, according to a May 2024 estimate) and further steps to reduce taxes. The CBO is a nonpartisan agency, so it makes calculations based on current law. The CBO forecasts an increase in tax revenues due to the expiration of tax benefits at the end of this year. Most analysts consider the extension of this term likely, Bloomberg notes.

At some point, long before the debt reaches the stratosphere, the patience of financial markets will run out. Bond prices will collapse, long-term Treasury bond rates will soar, and the government will default — either openly or under the guise of rising inflation, Bloomberg writes.

Rising yields on Treasury securities means that the US will pay an ever-increasing amount to service the debt. In 2025, these payments are expected to reach 3.2% of GDP. According to CBO estimates, net interest payments will continue to grow and reach 6.1% of GDP by 2035.

The CBO forecast is important primarily because it highlights a problem long known to investors, politicians, and regulators: current US government spending is too high to sustain at this level for several more decades without risking the American economy and US financial market leadership. Despite the rather pessimistic forecasts presented in the report, several important points should be considered:

1.    This forecast is merely an extrapolation of current indicators and forecasts into the future. If nothing changes, problems on the 30-year horizon are quite likely. This also means that changes in markets and the economy can drastically affect forecasts. But just a year ago, the CBO's calculation was more pessimistic, which did not prevent investors from buying long-term Treasury bonds with lower yields than now. The forecast heavily depends on the level of interest rates in the economy. The assumptions embedded in it suggest that the Fed will maintain relatively tight monetary policy over the next 30 years. This forecast also assumes that GDP growth will gradually decline following the falling rate of population growth, and labor productivity will remain at the current level. It is not entirely clear why the US should adhere to tight monetary policy in conditions of slowing GDP growth and stable inflation. Nevertheless, this is extrapolated decades ahead.

2.    The problem with estimating future GDP growth rates is that we cannot reliably predict future growth in capital and labor productivity. The impact of AI will be one of the key factors. So far, we can only confidently say one thing: optimism about AI, combined with the massive monetary and fiscal stimuli of previous years, has led to an overvaluation of the US stock market, second only to the dot-com bubble. This has led many to feel wealthier, spend more, and save less, driving inflation, which caused a longer period of high rates than previously expected. The development of AI, regardless of the current overvaluation of the stock market, could become a key technology capable of ensuring growth in labor and capital productivity. Which companies will become leaders in developing commercially successful AI products or mass-producing robots with a useful level of intelligence for labor tasks cannot be reliably predicted. However, the widespread use of AI becoming commonplace within 30 years is quite likely. And population growth as the main source of GDP increase may eventually become an artifact of the past.

3.    Do not underestimate that the situation in the economy and markets can change dramatically in the near future. Even without a recession, a stock market correction would seem quite logical and could significantly affect investor and household sentiment. The sharp market decline in April once again showed how sensitive stock prices are to unexpected negative economic events. The overvaluation of markets only partially explains this dynamic. The second reason is likely the sharp increase in volumes of speculative trading in options and other complex instruments, which can amplify sell-offs when key option execution levels are breached. A market correction should lead to a decline in investor optimism and a reduction in consumption, which could allow the Fed to lower the rate without risking inflation. Of course, US trade policy remains another important factor of uncertainty for the Fed, but there is a non-obvious chance that it will not be excessively inflationary. This seems realistic, for example, in the case of currency devaluation of exporting countries and reaching agreements on mutual reduction of trade and non-trade barriers between the US and major trading partners that are not geopolitical rivals (China is not among them).

4.    Do not view the situation in the US in isolation from the rest of the world. The debt situation in Japan and the largest Western European countries is no less problematic. However, unlike the US, they have significantly less economic and political autonomy, more acute demographic problems, and a less flexible economic system. China also has a huge debt burden and significant structural problems, and economic flexibility largely depends on the goals and rationality of political and economic decisions made by the Chinese Communist Party (CCP). In other words, for the US debt to maintain its status as a safe asset, the country does not need to make a phenomenal economic leap or conduct a radical restructuring of the system. It is important to maintain sufficient competition in the economy and politics, reduce spending to a reasonable level, maintain technological leadership, and create favorable institutional conditions for international capital. This will help remain the most attractive alternative against the backdrop of other countries and financial markets. Over the next thirty years, the first three factors will likely become subjects of constant discussion. Regarding the latter, most investors have a common opinion — even in the medium term, the US has no alternatives in terms of the scale and level of economic development, as well as the stability and capacity of financial markets.