Investment
Institute
Macroeconomics
US debt ceiling impasse: Unnecessary and unavoidable
Key points
- The US is projected to see fiscal deficits average 5.5% over the next five years. Official forecasts see debt rising to 195% of GDP in 30 years’ time from 98% if policy is unchanged
- We argue that there is no specific point at which debt becomes unsustainable but look at various thresholds where markets may demand an increasing premium to lend to the US. Current debt projections exceed those thresholds
- A debate about long-term fiscal policy is overdue. It should consider long-term spending commitments, how they are financed and how effectively they are used. The upcoming debt ceiling impasse does not seem the appropriate vehicle for that debate and threatens financial stability
- While timing is fluid, the debt ceiling debate currently look to come to a head around late July
- We do not expect the US to default on its obligations, but we do foresee material market volatility while a resolution is sought, which we argue is a necessary part of the process. We also see scope for a lasting weakening in risk appetite if fiscal policy tightens materially as part of any resolution
US debt ceiling impasse: Unnecessary and unavoidable
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