US deficit closure possible if country tackles healthcare costs, says ING’s Willem Verhagen

Willem Verhagen, senior economist at ING Investment Management, says that pruning the US federal deficit is more feasible than some believe, but it will require the country tackle its exploding healthcare costs.

The past few years have been mostly about downside risks so to stay with this tradition we begin with listing some of these animals. Since the second half of last year, markets and pundits have worried a lot about the US fiscal situation. This is likely to remain an issue for some time to come, not so much because the US actually has a big deficit problem but rather because of the political stalemate that characterises the country. The budget deficits seen since 2008 have to a considerable extent been cyclical, i.e. a closure of the output gap would go a long way in resolving the budget deficit via higher tax revenues and lower social security outlays.

Related to this, the US could be a lot closer to debt stabilisation than many pundits think. The Centre on Budget and Policy Priorities (a non-partisan research institute on US fiscal policy) has calculated that $1.4 trn in additional deficit savings over the next ten years should be enough to stabilise the US debt to GDP ratio below 75% in 10 years’ time. This amounts to some 0.6% of expected cumulative GDP over that period, i.e. very feasible from an economic point of view. Nevertheless, in all this it remains vitally important that the US tackle the projected explosion of healthcare costs which should be economically feasible as well because there are a lot of inefficiencies in the system.


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