US Fiscal Deficit Finally Surpasses $1 Trillion... Impact of Tax Cut Policies

[Image source=AP Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] Last year, the U.S. fiscal deficit exceeded $1 trillion for the first time in seven years. Although the U.S. economy is currently booming, the fiscal deficit has grown as large as it was during the global financial crisis, raising concerns that anxiety in the international financial markets, including the U.S., may increase in the future.

According to foreign media such as CNBC, on the 13th (local time), the U.S. Treasury Department announced that the U.S. government's fiscal deficit last year reached $1.02 trillion, surpassing $1 trillion for the first time in seven years since 2012. This figure represents a 17.1% increase compared to 2018. The Treasury cited increased military spending and reduced tax revenues due to corporate tax cuts as the main causes. Previously, the Donald Trump administration had implemented large-scale tax cuts and expanded fiscal spending since the end of 2017, with President Trump arguing that economic growth would expand due to the tax cuts, thereby increasing fiscal revenues.

The U.S. fiscal deficit reached a peak of $1.4 trillion in 2009, immediately after the 2008 global financial crisis, and remained around the $1 trillion mark until 2012 due to fiscal expansion policies. Afterward, concerns about fiscal soundness emerged, and the deficit did not exceed $1 trillion. In particular, President Trump criticized the Obama administration's loose fiscal management after taking office and pledged to improve fiscal soundness, so criticism regarding the fiscal deficit is expected.

The U.S. economy is currently experiencing the longest economic expansion in history at 10 years and 7 months, maintaining a growth rate in the 2% range, indicating a boom. However, concerns are rising that the increasing fiscal deficit and decreasing revenues will negatively impact the economy in the future. Earlier in January last year, the Congressional Budget Office (CBO) projected that the federal government's fiscal deficit would surpass $1 trillion by 2022, but it exceeded $1 trillion much earlier, raising voices of concern about weakening fiscal capacity.

Furthermore, if the U.S. government issues a large amount of government bonds to cover the fiscal deficit, shocks to the financial markets are expected. The U.S. government already issued $814 billion in government bonds from July to September last year, and if additional large-scale bond issuance occurs, an imbalance in bond supply and demand is expected, which could deepen the inversion phenomenon between short- and long-term bond yields. Issuing a large amount of government bonds at once to cover the fiscal deficit may cause a short-term oversupply, leading to a sharp rise in short-term bond yields and increasing the likelihood of a yield curve inversion.

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