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The U.S. national debt just reached $33 trillion for the first time, heightening concerns about the country’s fiscal health amid signs of a slowing economy and looming global shutdown. of the government.
The U.S. national debt is on track to exceed $50 trillion by 2030, according to U.S. Treasury Department projections, raising alarms among economists, credit rating agencies and investors. budget hawks in Washington, DC. The new debt projections arrive as a deadline. Mid-October is approaching for lawmakers in Congress to once again raise the federal debt ceiling or risk a first-ever default on U.S. debt, which would be catastrophic for the stock market.
Tax fight over the national debt
The stakes are high on Capitol Hill right now, as politicians clash over spending levels as they head toward the end of the federal government’s fiscal year on September 30. In less than two weeks, operational funding for the U.S. government will end, leading to the first government shutdown since 2019.
Adding to this pressure cooker situation are new national debt figures and the prospect of a historic default on the federal debt if lawmakers do not raise the ceiling within the next month. Some within the Republican Party are calling for more than $1 trillion in additional spending cuts and a revival of initiatives at the U.S.-Mexico border. Proposals to which the Democrats balked.
Try, try again
The latest impasse over the budget and national debt comes months after a similar struggle in the spring and early summer. The battle narrowly averted a default after it was agreed to cut federal spending by $1.5 trillion over the next decade and limit future spending to 1 percent of GDP growth. GDP in 2025. However, according to the US Treasury Department, the national debt remains on the rise. on track to reach $50 trillion by 2030, as interest payments rise alongside the costs of financing the social programs needed to care for America’s aging population.
Republicans continue to demand budget cuts from the Biden administration, even as they resist White House efforts to raise more revenue through changes to the tax code. The president has proposed higher taxes on corporations, including technology companies. But Republicans have resisted these proposals, favoring spending cuts over tax increases.
Market impacts
Rising debt levels and political gridlock in Washington, D.C., are creating more uncertainty in stock markets at a time when traders and investors are also grappling with many concerns. These already include a pronounced economic slowdown in China, crude oil prices that have returned above $90 a barrel and to their highest level in 10 months, and interest rates that are expected to remain high for more long, maybe much longer.
The prospect of a government shutdown and debt default adds to an atmosphere of caution after markets saw a meteoric rally in the first half of this year that saw the benchmark S&P500 the index increased by almost 20% through the end of June. Since then, markets have become sluggish as the economic outlook and corporate earnings have become less clear.
Although the first U.S. default could lead to a stock market crash, not only in the United States but around the world, the chances of that happening seem slim. Most policymakers recognize the enormous harm such a scenario could cause. Even though the major indices have been on a downward trend since early August, there are currently no signs of an imminent stock market crash.
The National Debt Debate: What’s Next
It seems likely that politicians will continue to fight over the national debt, the federal budget and the country’s fiscal health until the September 30 deadline. If history is any guide, the current impasse will end with a last-minute compromise that avoids a government shutdown, raises the debt ceiling and leads to a stock market rally.
At the same time, the US Treasury Department just released a report showing that the federal deficit, that is, the difference between what the government spends and what it collects through taxes and other sources in revenue, grew 61% over the last year to $1.5 trillion. This type of data has led credit rating agencies and economists to call for permanent changes in fiscal management in Washington, DC.
On the date of publication, Joël Baglole did not hold (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
