The US is facing a similar fiscal situation to the UK in 2022, with policymakers pushing for large deficit-increasing policies that could lead to financial turmoil. The current reconciliation package would increase the primary deficit by 1.7% of GDP in 2027, comparable to the UK’s 1.5% in 2022. The US’ fiscal situation is worse than the UK’s was, with a larger deficit impact and higher debt levels.
The UK’s Chancellor announced a “mini-budget” in September 2022, providing temporary relief for households on energy prices along with permanent tax cuts. The budget increased primary deficits by 1.5% of GDP, sparking turmoil in the bond market. Prime Minister Liz Truss fired her Chancellor and eventually resigned, while the Bank of England stepped in to calm the market.
Unlike the UK, US investors are not expecting the Federal Reserve to raise rates going forward. However, financial institutions are warning that the package exceeds their prior expectations, raising concerns about the fiscal outlook. To avoid a “Truss moment,” Congress should abandon its efforts to add trillions of dollars to the debt and adopt a more fiscally responsible approach.
A thoughtful package of tax and spending reforms could help improve debt sustainability, strengthen economic growth, lower interest rates, reduce inflationary pressures, promote investment, and make the government and tax code more efficient. This would require scaling back new tax priorities, prioritizing pro-growth and fiscally responsible extension of TCJA provisions, and further building on proposed offsets.
Source: https://www.crfb.org/blogs/americas-truss-moment