World should maintain caution over expansion of U.S. fiscal deficit

The Yomiuri ShimbunDeterioration of the United States’ fiscal situation is a concerning factor that can endanger the global economy and market stability. It is imperative to watch closely the course of the nation’s budget deliberations, which are expected to face difficulties due to the confrontation between the opposing political parties.

The administration of President Donald Trump submitted a budget request to Congress for fiscal 2020. The deficit is projected to reach about $1.1 trillion (¥122 trillion). Trump’s budget proposal also projects the deficit will reach the $1 trillion mark for four consecutive years from fiscal 2019. It says the cumulative deficit for the decade to come will be about $7.3 trillion.

When concern grows over the fiscal situation, the yield on U.S. Treasury bonds is likely to rise. An increase in the yield burden can harm corporate performance and stagnate the housing and automobile markets, possibly putting downward pressure on the economy.

Massive amounts of Treasury bonds are held by governments of Japan, China and many other countries, as well as by financial institutions. It is necessary to be sufficiently cautious about the risk that the deteriorating U.S. fiscal situation may have a ripple effect across the world.

During the administration of President Ronald Reagan in the 1980s, fiscal and trade deficits, dubbed “twin deficits,” weighed on international economic growth. The U.S. trade deficit reached a record high last year.

Is it certain that the Trump administration will not repeat the same mistake? This anxiety cannot be dispelled.

The U.S. budget is compiled by Congress, based on the budget proposal.

What is problematic is that the opposing parties may heighten the pressure to spend more, girding for the 2020 presidential election. There are concerns that the scale of the budget will become larger than that mentioned in the proposal.

Constructive debate a must

The Democratic Party has already presented policies that could drastically increase the budget, including establishing a universal health insurance system. The party cannot be expected to play the role of curbing the administration and the Republican Party, and also putting the brakes on fiscal deterioration.

It is also worrying that the administration and the Democratic Party have made clear their stance of confronting each other.

The budget proposal includes about $8.6 billion to construct a U.S.-Mexico border wall. A proposal for construction recently caused a partial shutdown of the U.S. government. The amount far exceeds the $1.4 billion that was agreed on between the parties in the fiscal 2019 budget. The budget compilation may be delayed due to the Democrats’ opposition.

The issue of “debt limits,” which establish the total amount of money that the U.S. government is authorized to borrow, is also likely to cause a dispute between the parties.

The federal debt limit was reinstated this month, causing the government to be unable to issue Treasury bonds at will. The government is expected to be able to procure funds up to September. If no agreement is reached over a limit increase by that time, the redemption of Treasury bonds and the payment of yields will not be properly conducted, possibly causing the United States to default on its debts.

In 2011, the administration of Barack Obama and the Republican Party confronted each other over the debt limit, leading to Treasury bonds being downgraded and causing chaos in markets across the world.

A situation in which markets lose trust in the U.S. fiscal situation should not be allowed to occur again. The current administration and the opposing parties must repeatedly hold constructive debate while preventing their antagonism from growing worse.

(From The Yomiuri Shimbun, March 14, 2019)Speech


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