Goldman Raises Red Flag Over US Gov’t Spending

US fiscal policy is headed for “uncharted territory.” That’s how a team of economists at Goldman Sachs, led by Jan Hatzius, have described the government’s current spending and tax plans, as they also warned that the growth kick for the economy from those strategies will eventually fade.

“Congress has voted twice in the last two months to substantially expand the budget deficit despite an already elevated debt level and an economy that shows no need for additional fiscal stimulus,” said the Goldman economists, MarketWatch reported.

Tax cuts signed into law by US President Donald Trump in December will add $1.5 trillion to the deficit over a 10-year period.

Goldman economists expect the US debt level to hit 5.2% of gross domestic product by 2019, and keep climbing gradually from there. In the past, a strengthening economy and rising debt burden has prompted Congress to raise taxes and cut spending. But this time, the opposite has occurred, which will leave revenues low for a few years and push spending to its “highest point in decades”, they said.

Hatzius said such fiscal expansion should lift growth by around 0.7 percentage points in 2018 and 0.6 percentage points in 2019, but then “it will likely come to an end after that”. Among the reasons: control of congress will likely change after this year’s midterm elections, meaning it will be tougher to keep expanding that deficit.

Goldman said it expects it will take more bipartisan support, and, likely, divided control of the government, for substantial fiscal changes to take place. Neither Trump nor the Republican Congress have shown any signs of moving toward deficit reduction legislation ahead of the 2020 presidential elections, they said.

What this suggests is the “primary deficit is unlikely to widen much further from here absent an economic downturn but that it is unlikely to shrink substantially for the next few years,” said the economists.