What could rising deficits mean for the future?

“Why Trump’s Soaring Deficits Don’t Matter Right Now

Markets are correct in shrugging off any impact from soaring deficits under the Trump administration, suggests Goldman Sachs’ top equities strategist. “As the private sector pulls back amid the [COVID-19] crisis, governments are right to step in and bridge the gap through large increases in spending. In the current environment of exceptionally weak demand and economic activity, running large government deficits won’t be inflationary, and is not a reason to worry about a debt crisis, least in countries like the U.S., U.K. and Japan or other advanced economies that have a floating exchange rate and their own central bank. And it’s definitely not a reason to worry about a growth drag,” said Goldman’s David Kostin in a new research paper.

Following the recent passing of a $3 trillion aid package to jump start a U.S. economy reeling from the health pandemic, deficits will rocket higher when the books are closed in 2020. The U.S. deficit will tally more than $3.8 trillion this year and $2.1 trillion in 2021, according to the latest from the Committee for a Responsible Federal Budget. In the last fiscal year, the budget deficit totaled $984 billion in part driven by the Trump tax cuts. The nonprofit organization estimates the debt held by the public will exceed the size of the U.S. economy by the end of fiscal year 2020, and eclipse the prior record hit after World War II by 2023. President Trump is projected to add more than $7 trillion to the national debt for the fiscal years 2018 through 2021, per the organization’s calculations. That could swell by $1 trillion more if lawmakers pass another round of COVID-19 stimulus legislation, as has been rumored.

Although some market watchers have worried about the soaring deficit’s impact on the economy and markets (namely inflation eating up consumer purchasing power and asset returns), strategists like Kostin — and even U.S. Treasury Secretary Steven Mnuchin — say now is not the time to panic. The more important issue is to get the economy moving in the right direction so that deficits could be reduced naturally via economic growth.

Explained Kostin, “Certainly in the short term, it’s hard for me to see how larger deficits would lead to weaker growth; all else equal, a bigger deficit delivers more stimulus to the economy. And we absolutely need substantial stimulus right now as the crisis continues to unfold. I would become more concerned if we got to the other side of the crisis and of the pullback in the private sector—the timing of which will depend on the trajectory of the virus, government restrictions to contain it, and the availability of effective treatments and vaccines—and we still have deficits close to current levels and no plan for normalizing them over time. But that still seems like a long way away.”