The U.S. national debt just reached $33 trillion for the first time, heightening concerns about America’s fiscal health amid signs that the economy is slowing and with a government-wide shutdown looming on the horizon.
According to projections by the U.S. Treasury Department, the national debt in the U.S. is on track to surpass $50 trillion by 2030, raising alarm bells among economists, credit rating agencies, and fiscal hawks in Washington, D.C. The new debt projections come as a deadline of mid-October nears for lawmakers in Congress to once again raise the federal debt ceiling or risk a first-ever default on U.S. debt that would be catastrophic for the stock market.
Fiscal Fight Over the National Debt
The stakes are high on Capitol Hill right now as politicians spar over spending levels as they race towards the end of the federal government’s fiscal year on Sept. 30. In less than two weeks, the U.S. government’s operational funding will end, which would lead to the first government shutdown since 2019.
Adding to the pressure cooker environment are the new national debt figures and the prospect of a historic default on the federal debt if lawmakers don’t raise the ceiling within the next month. Some within the Republican Party are calling for more than $1 trillion of additional spending cuts and to resurrect initiatives at the U.S.-Mexico border. Proposals that Democrats have balked at.
Try, Try Again
The latest standoff over the budget and national debt comes months after a similar fight this spring and early summer. That battle saw a debt default narrowly averted after it was agreed to cut federal spending by $1.5 trillion over the next decade and limit future spending to 1% of GDP growth in 2025. However, according to the U.S. Treasury Department, the national debt remains on track to reach $50 trillion by 2030 as interest payments grow along with costs to fund social programs that are needed to care for America’s aging population.
Republicans continue to demand budget cuts from the Biden administration even as they resist efforts by the White House to raise more revenue through changes to the tax code. The president has proposed higher taxes on corporations, notably technology companies. But Republicans have resisted those proposals, favoring spending cuts over tax increases.
Market Impacts
Rising debt levels and the political standoff in Washington, D.C., create more uncertainty for stock markets at a time when traders and investors are also grappling with numerous concerns. These already include a pronounced economic slowdown in China, crude oil prices that are back above $90 a barrel and at a 10-month high, and interest rates that are expected to be higher for longer, possibly much longer.
The prospect of a government shutdown and debt default are adding to an atmosphere of caution after markets enjoyed a blistering rally in this year’s first half that saw the benchmark S&P 500 index rise nearly 20% through the end of June. Since then, markets have turned sluggish as the outlook for the economy and corporate earnings has gotten less clear.
While a first-ever debt default on the part of the U.S. could lead to a stock market crash, not just in America but all over the world, the chances of that happening appear slim. Most politicians acknowledge the huge harm that such a scenario would cause. While the major indices have been trending lower since the start of August, there are currently no signs of an impending stock market crash.
The National Debt Debate: What’s Next
Politicians seem likely to continue battling over the national debt, federal budget, and the nation’s fiscal health all the way up to the Sept. 30 deadline. If history is a guide, the current stalemate will end with an 11th-hour compromise that averts a government shutdown, raises the debt ceiling, and leads to a relief rally in the stock market.
In the meantime, the U.S. Treasury Department just released a report that showed the federal deficit, which is the difference between what the government spends and what it collects through taxes and other revenue sources, rose 61% over the last year to reach $1.5 trillion. This kind of data has led to calls by credit rating agencies and economists for permanent changes to fiscal management in Washington, D.C.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
