Study warns of looming US fiscal crisis

The rapidly growing US debt could soon spark a European-style crisis unless Congress moved forcefully, the Congressional Budget Office (CBO) warned this week in a new study.

|||

The rapidly growing US debt could soon spark a European-style crisis unless Congress moved forcefully, the Congressional Budget Office (CBO) warned this week in a new study.

The report said the US’s debt was on pace to equal the annual size of the economy within a decade. It warned of a possible “sudden fiscal crisis” if it was left unchecked, with investors losing faith in the US government’s ability to manage its fiscal affairs.

At issue is the $9.7 trillion (R65 trillion) of US debt held by investors and foreign countries, the measure that economists deem most important. Government accounts, such as the Social Security trust funds, account for the rest of the $14.3 trillion total debt.

The study reverberated as Vice-President Joe Biden and senior legislators spent several hours behind closed doors. The talks were aimed at outlining about $2 trillion in deficit cuts over the next decade, part of an attempt to get enough support to allow the Treasury to borrow more.

The CBO, the non-partisan agency that calculates the cost and economic impact of legislation and government policy, said America’s rapidly growing debt burden increased the probability of a fiscal crisis in which investors lost faith in US bonds and forced policymakers to make drastic spending cuts or tax increases.

“As Congress debates the president’s request for an increase in the statutory debt ceiling, the CBO warns of a more ominous credit cliff – a sudden drop-off in our ability to borrow imposed by credit markets in a state of panic,” House budget committee chairman Paul Ryan said.

The findings are not dramatically new, but the budget office’s analysis underscores the scope of America’s fiscal problems as negotiators struggle to lift the current $14.3 trillion debt limit.

With the fiscal imbalance requiring the government to borrow more than 40c of every dollar it spends, the CBO predicted that without a change of course the national debt would rocket from 69 percent of gross domestic product (GDP) this year to 109 percent of GDP by 2023.

Economists warn that rising debt threatens to devastate the economy by forcing interest rates higher, squeezing domestic investment, and limiting the government’s ability to respond to an economic downturn.

But most ominously, the CBO report warned of a “sudden fiscal crisis” in which investors would lose faith in the US government’s ability to manage its fiscal affairs. In such a panic, investors might abandon US bonds and force the government to pay unaffordable interest rates. – Sapa-AP

Source: http://www.iol.co.za/study-warns-of-looming-us-fiscal-crisis-1.1088049

Robert Schumann Economic policy Biffy Clyro Italy Television industry Tromso