Research Team at Wells Fargo, notes that in fiscal year (FY) 2016, the Congressional Budget Office (CBO) expects the US federal budget deficit to grow relative to the size of the economy for the first time since 2009, once again turning the U.S. into the land of the rising deficits. Key Quotes “The CBO, in its most recent Budget and Economic Outlook, points out many of the adverse effects of continually running large budget deficits, which can lead to a growing national debt as a share of the economy. These effects include greater spending on interest payments, a reduction in national saving—which leads to a lower capital stock and thus lower wages and productivity—and reduced flexibility to respond to fiscal and economic challenges. Our analysis of the CBO’s budget outlook shows that the federal deficit will continually rise over the next 10 years from 2.9 percent of GDP in fiscal year 2016 to 4.9 percent in 2026. The result is a rapid pace of growth in the national debt from 75.6 percent of GDP to 86.1 percent of GDP over the same time horizon. The Outlook Continues to Get Worse We have seen the importance of economic assumptions on the fiscal outlook. As the CBO continues to revise down its view of long-run potential GDP growth, the pace of federal revenue growth also slows in its budget outlook. Revenues will also be influenced by firms attempting to lower their tax liabilities or leaving the country to avoid higher taxes. Outlay growth continues to rise faster than the pace of nominal GDP growth, driven in large part by increased spending on Social Security, health care and interest on the national debt. Federal deficits are set to rise relative to the size of the economy for the first time since 2009 and will continue to rise over the next decade. The result is a growing level of debt, which can have serious implications for the federal budget, U.S. economy and decision makers. There are three major adverse consequences of the composition of federal spending and the growing level of debt over the next 10 years. First, spending on entitlement programs and net interest will crowd out other forms of federal spending, thus we expect only minor contributions to GDP growth from federal government spending over the next 10 years. Second, the growing stock of debt will begin to crowd out private sector investment and, over the long-term, result in a lower stock of capital in the economy and by extension slower productivity and wage growth. This pattern of slower economic growth, in our view, can be seen in the many challenges facing Japan today. Finally, there is no clear answer at what point the debt-to-GDP ratio will result in global investors demanding higher returns on U.S. debt instruments. That said, should interest rates on U.S. Treasuries rise to reflect a “political uncertainty” premium and/or a greater risk premium due to the amount of federal debt outstanding, the result could create serious fiscal sustainability issues for the federal government. The CBO continues to tell the same story each year of these consequences. Many policymakers agree that federal fiscal policy is on an unsustainable course; however, in the current political environment it seems unlikely that policymakers will address these issues.” For more information, read our latest forex news.