Congressional Budget Office (CBO) Director Phillip Swagel warned the United States could suffer a similar market shock as seen in the United Kingdom during former Prime Minister Liz Truss’s brief stint leading Britain, citing the nation's “unprecedented” fiscal trajectory.
In an interview with the Financial Times this week, Swagel discussed the country’s rising debt, while warning of the dangers of the U.S. facing “what the U.K. faced with former prime minister Truss — where policymakers tried to take an action, and then there’s a market reaction to that action.”
Truss roiled markets in October 2022 as she pressed for significant tax cuts, including changes lessening the tax burden on wealthier individuals without offsets, as well as other economic measures. The budget proposal spurred a major selloff of British debt, forcing U.K. interest rates to decades-long highs and causing the value of the pound to tank.
Truss defended her agenda as a means to spur economic growth, but she eventually stepped down as prime minister after less than two months on the job.
While Swagel said the U.S. is “not there yet,” he raised concerns of how bond markets could fare as interest rates have climbed.
He added that the nation has “the potential for some changes that seem modest — or maybe start off modest and then get more serious — to have outsized effects on interest rates, and therefore on the fiscal trajectory.”
In the CBO’s long-term budget outlook report released last week, the nonpartisan agency projected the national deficit would rise “significantly in relation to gross domestic product (GDP) over the next 30 years, reaching 8.5 percent of GDP in 2054.”
The budget scorekeeper attributed the projected growth to rising interest costs, as well as “large and sustained primary deficits, which exclude net outlays for interest.”
Some budget experts, however, have cast doubt on Swagel's alarm.
Bobby Kogan, senior director of federal budget policy at the Center for American Progress, a left-leaning think tank, pointed to improved deficit projections in recent years, as well as forecasts from the CBO he said “don't project anything that looks like a panic.”
“If someone were thinking about, ‘Should I panic or should I not panic?’ I would just say, ‘hey, the underlying situation has gotten better, right?’” Kogan said, adding “there's been lower, long-term projected deficits in the Biden administration.”
“You either should have been worried a long time ago, or you should be less worried now,” he said. “Because we've been on roughly the same path for forever, but to the extent that it's different, it's better.”
At the same time, Joe Gagnon, a senior fellow at the Peterson Institute for International Economics, argued a similar episode to what was witnessed in the U.K. over a year ago “could happen” in the U.S. if a federal proposal ignited similar concerns.
“You could imagine some future Treasury secretary who doesn't know what he's doing in markets, [people] don't have any faith in that person and they make some crazy announcement that catches everyone by surprise. I could well imagine a 50 basis point rise in US bond yields,” he said.
But he added that “the fact that we already have so much debt means that any further surprise could really have a similar effect on us that that surprise had on the UK.”
