US Fiscal Risk Steady Ahead Of Senate Vote On Massive Spending Bill
By James Picerno | The Milwaukee Company
The stakes are high for fiscal risk linked to the spending bill moving through the Senate.
The White House sees strong economic stimulus effects from the spending bill, but others are skeptical.
Markets are calm, but rising interest costs for the government may strain outlook
Republicans in the Senate are working to pass President Trump’s huge tax and spending bill. If approved, the legislation will move to the House, which will vote on the package and – if it survives – move it to the desk of the President, who’ll sign it into law. Trump has asked Congress to deliver the bill to him by this Friday, July 4.
Hanging in the balance is the outlook for the federal deficit and the near-term reaction, if any, from financial markets. The Congressional Budget Office (CBO) estimates that the current Senate version of the “One Big Beautiful Bill Act” (OBBBA) will raise the deficit by almost $3.3 trillion over the next decade – a nearly $1 trillion increase compared with the bill the House passed several weeks ago.
The GOP disputes the CBO estimates and argues that the economic stimulus linked to the bill is significantly brighter than some projections suggest. One line of reasoning is that the resulting growth could more than make up for any increase in deficit spending.
A recent review by TMC Research of economic projections from several think tanks shows that OBBBA could boost GDP by anywhere from 0.4% to 1.1% on average over the coming years. The White House’s Council of Economic Advisors, by contrast, anticipates a sharply higher pace of growth: 4.5% to 4.9% by 2028 and 2.4% to 2.7% by 2034.
The stakes are certainly high, given that the current federal deficit as a percent of the economy (GDP) is already hefty at 6.4% (for fiscal year 2024, according to CBO). Although that’s well below the spike to 14.7% during the Covid pandemic, budget hawks warn that a rise in the red ink from here will likely drive interest rates higher, in part because interest-rate payments will account for a worrisome two-thirds of the deficit’s increase in the years ahead. The potential for a problematic feedback loop may be lurking if higher interest payments raise the deficit, which in turn lifts interest rates, which then raises interest payments, and so on.
US fiscal risk overall has remained steady in recent history, according to a model developed by TMC Research. After a sharp spike during the pandemic, our Fiscal Risk Index has pulled back and remains at the upper range — 0.3 — that’s prevailed over the last several years.
Three of the ten indicators used to compute the Fiscal Risk Index remain in a high-risk posture: one-year changes for the price of gold and the total amount of government debt, along with a monthly read on the budget surplus/deficit.
The question is how or if market expectations will change if the spending bill in Congress becomes law. Markets have largely downplayed fiscal risk so far, or so it appears, based on the 10-year Treasury yield, for instance. The benchmark rate in afternoon trading today (Monday, June 30) is roughly 4.23%, a middling level compared with the past eight months.
A key question for markets: Will the fiscal-risk outlook change in the months ahead? After the spending bill becomes law, we’ll update our Fiscal Risk Index for perspective. Meantime, TMC Research is closely monitoring the data and looking for clues that may signal what’s in store on the other side of the current legislative session.
