Investment update – September 2013
The new threat to the US economy
As effortlessly as magic, the US economic recovery is helping shrink Washington’s budget deficit as more
taxes and income roll in and fewer welfare payments are sent out. The Congressional Budget Office predicts
the US federal deficit will narrow to about 4% of GDP this year and dwindle to 2.1% of output by 2015 – less
than a quarter of the post-crisis high of 8.5% of GDP in 2010.
Better tidings on the economy and government finances, however, are producing a fresh danger for the US;
complacency among its divided lawmakers over tackling the country’s long-term debt woes. The stemming of
Washington’s financial bleeding only postpones for a short while the next fight over raising the US
government’s debt limit and could well make the combatants even more ideological when that clash comes.
The solutions to the US government’s long-term financial challenges are simple enough. Lawmakers can
boost taxes (the Democrat preference) or curb spending increases (the Republican inclination) or, more
sensibly, a mixture of both. A Republican-controlled House of Representatives, a Democrat-controlled Senate
vulnerable to filibusters and a Democrat president only promise more gridlock now there is no imminent crisis
to force compromises.
Ceiling ransom
The numbers show politicians can’t afford to be at loggerheads for too long, though. While the Congressional
Budget Office forecasts the ratio of federal government debt to GDP to slide from 76% in 2014 to 71% by 2018
and 2019, the figure is predicted to climb to unspecified levels after that as ballooning spending on welfare and
health enshrines a budget deficit in even good economic times. The other problem for the US government is
that the days will soon end when it can refinance debt at record-low interest rates. Bond yields are bound to
rise when the economic recovery solidifies and the Fed (the one arm of the government that is not
complacent) ends its asset-buying.
The next showdown could well be in September when Washington needs to raise the US government debt
ceiling, a process that used to be a formality until Republicans two years ago saw its potential for blackmail.
Democrats and Republicans are really engaged in a proxy battle over the role and size of government. It
would be wrong to say that both sides are equally to blame. It’s the Republicans who are prone to use the debt
limit and the economy as hostage to their quest for smaller government. A lasting solution might take another
one or two Congressional elections for voters to decide between higher taxes or fewer services. Perhaps, the
best investors can hope for as the next debt-ceiling fight looms is that politicians will take some steps towards
a balanced, long-term fix for government finances, while avoiding a big withdrawal of fiscal stimulus or a crisis
of investor confidence that casts a spell on the economic recovery.
RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238429. Warning: This information does not consider your personal
circumstances and is general advice only. You should not act on any information without obtaining professional financial advice specific
to your circumstances. Past performance is not an indicator of future performance.
This article has been produced by FIL Investment Management (Australia) Limited ABN 34 006 773 575, AFSL No. 237 865 (“Fidelity
Australia”). Fidelity Australia is a member of the FIL Limited group of companies known as Fidelity International. © FIL Investment
Management (Australia) Limited 2013.
RI Advice Group Pty Ltd ABN 23 001 774 125 AFSL 238429 | Registered office Level 23, 242 Pitt Street, Sydney NSW 2000 | www.riadvice.com.au