Structural Issues May Keep U.S. Deficit Elevated

Text on screen: PIMCO

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ALLISON BOXER: Text on screen: Allison Boxer, Economist

Can you just talk us through what the deficit outlook is? And I think, you know, more importantly, you know, what the implications are for investors, how concerned should we be about this?

LIBBY CANTRILL: Text on screen: Libby Cantrill, Head of U.S. Public Policy

Regardless of who wins the White House in November or the composition of Congress going into 2025, the budget deficit is expected to be the biggest loser in this election. But maybe for a different reason than people assume, I think that the expectation is if President Biden gets reelected, we'll see a lot more spending. If President Trump were to get reelected, then we'd see even more tax cuts outside of just the extension of the Trump tax cuts. And I would make the argument that actually that's probably not going to be the case. That the fiscal space to do those things for more spending or for additional tax cuts, again outside of the extension of the Trump tax cuts, is just going to be relatively limited because deficits are structurally high. And why is that? Of course, we have seen a real backup in interest rates. So the interest expense is a much bigger portion than it has been historically.

But really importantly, Alli, this is sort of the elephant in the room, so to speak and neither a gentlemen, neither a candidate is going to address it, which is just the cost of social security and Medicare, particularly as the population ages and as more folks go on these important programs, but likely, they are not going to be reformed. And that means that, again, we are probably looking at five, six, seven percent deficits over the next ten years before we even talk about additional tax cuts or additional spending. So structurally, because neither candidate is likely to reform social security and Medicare, because those things don't, they pull very well, so, reform does not pull well. We are expecting that we are going to see quite high deficits. But that leads to your next question, which is, does this matter?

And yes, I mean, I think it's, again, a more of a nuanced answer. Does this matter for the markets? Like, you know, Pimco, other market participants are concerned about the high fiscal deficits and the trajectory of US debt part particularly as a percentage of GDP. But we are not expecting a sort of a lose trust moment, if you will. We are not expecting a big sell off in US treasuries, stemming from a loss of confidence from investors, for instance and for many reasons. But one reason is because, of course, the US dollar continues to be the reserve currency of the world and importantly, the US treasury bond continues to be the reserve asset of the world. And we don't think, we don't expect those things to change, at least for the foreseeable future.

And as a result, you know, while we would expect the market may insist on higher interest rates at the long end of the curve, we are not going to expecting some sort of loss of confidence or big backup in rates.

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