Goldman Sachs pointed out that Trump’s spending plans cannot prevent U.S. national debt from rising to 'unsustainable' levels, which are currently second only to those during World War II.
Next year, the U.S. will need to pay $1 trillion in interest on its $36 trillion national debt, an amount exceeding the total of Medicare and defense spending. Goldman Sachs economists warn that if U.S. lawmakers delay addressing the deficit issue, extreme fiscal tightening may be required in the future to avoid a crisis.
Goldman Sachs’ Manuel Abecasis, David Mericle, and Alec Phillips noted in a report on Tuesday that although the spending bill passed by House Republicans, coupled with increased tariff revenues, will slightly reduce the budget deficit without accounting for interest payments, the bill's impact on the overall deficit remains largely unchanged given the rising borrowing costs.
The report emphasizes: 'The current path remains unsustainable—even in a strong economy, the primary deficit is far above normal levels, the debt-to-GDP ratio is approaching post-World War II peaks, and rising real interest rates are causing the growth rate of debt and interest payments as a share of GDP to far exceed previous cycle expectations.'
Goldman Sachs stated that the scale of future debt will greatly depend on interest rate trends over the next twenty years. Currently, the $36 trillion in national debt accounts for about 120% of GDP, and the U.S. Treasury must borrow new debt to pay increasing interest. Data from the think tank 'Committee for a Responsible Federal Budget' shows that U.S. interest payments on the national debt will reach $1 trillion next year, becoming the government’s second-largest expenditure after Social Security.
The Goldman Sachs team wrote: "If the debt continues to expand, in order to stabilize the debt-to-GDP ratio, the government will need to maintain a historically rare, economically costly, and politically challenging fiscal surplus." Both the Trump and Biden administrations used wartime budgets to respond to the pandemic, but even as the economy fully recovers, the fiscal floodgates have not closed.
The nonpartisan Congressional Budget Office estimates that Republican spending bills will increase the deficit by $2.8 trillion over the next decade. The White House and some Republican lawmakers argue that the forecast should not include the cost of extending Trump’s 2017 tax cuts—this policy is set to expire this year unless extended.
Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, pointed out that the key issue with the $36 trillion debt is that no one knows the 'unsustainable' tipping point. While Treasury Secretary Yellen has referred to a 'spending problem' rather than a 'revenue problem,' Goldberg believes that U.S. tax revenues are significantly inadequate compared to the size of GDP and government spending.
Goldberg stated last month: 'Either increase taxes, reduce spending, or do both. It sounds simple, but it is very, very complex politically and difficult to resolve.'
Goldman Sachs warned that delaying action will force Congress to make tougher choices in the future. If decisions are made too late, the government may need to implement 'extreme austerity measures that are economically costly and politically infeasible' to avoid disaster. The report states: 'A large-scale fiscal adjustment could lead to a decline in GDP, which would not actually reduce the debt-to-GDP ratio.'
More dangerously, politicians may choose to print large amounts of money to repay debt—historical examples from Germany's Weimar Republic in the 1920s show that such actions can trigger hyperinflation and social unrest.
However, the warnings of history may not always be remembered by authorities.