Goldman Sachs reportedly has warned that President Donald Trump’s $1.4 trillion tax cut could trigger a recession and a surging deficit.
“The U.S. fiscal outlook is not good,” Goldman’s chief economist Jan Hatzius said in a Sunday note cited by the New York Post.
Goldman's warning comes after the nonpartisan Congressional Budget Office said last month that the U.S. budget deficit will balloon over the next few years mainly because of deep tax cuts approved in December by congressional Republicans and Trump, Bloomberg reported.
The deficit - the amount that Washington's spending exceeds its revenues - will grow to $804 billion in fiscal 2018, which ends on Sept. 30, up from $665 billion in fiscal 2017, the CBO said, despite expectations of stronger near-term economic growth than the agency previously forecast.
The tax overhaul, which sailed through the Republican-controlled U.S. Congress in December without Democratic support, permanently cut the top corporate rate to 21 percent from 35 percent. Tax cuts for individuals, however, are temporary and expire after 2025.
Republicans, including Trump, have said their tax overhaul will lead to more take-home pay for workers and have touted the bonuses some workers received from their employers as evidence the law is working.
However, Hatzius painted a dim economic future.
"The current fiscal expansion ... must at some point give way not just to a neutral stance, which we expect by 2020, but to a tightening of fiscal policy that could restrict growth," Hatzius wrote, according to CNBC.com.
Hatzius dismissed economic projections by the Congressional Budget Office (CBO) as too “optimistic,” and sees the deficit ballooning to $2.05 trillion (7 percent of GDP) by 2028.
In one scenario, the bond market could punish the U.S. for its growing debt levels by making it more expensive to borrow — thereby swelling deficits further, according to the Goldman note cited by the Post. "An expanding deficit and debt level is likely to put upward pressure on interest rates, expanding the deficit further," Hatzius wrote.
That could end up constraining any economic stimulus packages during the next recession, which isn’t likely for the next “couple years,” the bank said.
The CBO projects that debt could equal GDP within a decade, a level not seen since World War II.
Goldman doesn’t believe that Congress is likely to do anything about the runaway deficits “in the near-term,” the Post reported.
"Lawmakers might hesitate to approve fiscal stimulus in the next downturn in light of the already substantial budget deficit," the economist said, according to CNBC.com.
"While we would expect some additional loosening of fiscal policy during the next downturn, there is a good chance in our view that it would be less aggressive than it was in the last few recessions," he wrote.
"Surprises are clearly possible in both directions, but we believe the risks are tilted in the direction of larger deficits than projected," Hatzius concluded. "While we expect Congress will eventually address the widening budget gap, it also seems quite likely to take longer than most market participants might expect."
For his part, Trump has taken to Twiter to tout his administration's economic accomplishments.
"The Economy is raging, at an all time high, and is set to get even better. Jobs and wages up," the president recently tweeted.
(Newsmax wire services contributed to this report).
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