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- The US needs to rein in its $1.5 trillion budget deficit, Nobel economist Paul Krugman said.
- Policymakers can do that either by hiking taxes or slashing spending on social programs.
- But they're unlikely to do that with Congress split.
The US needs to deal with its soaring budget deficit, but the only options available for it to do so mean that it probably won't, according to Nobel laureate Paul Krugman.
That's because the two paths to getting the deficit under control are: slash spending on social programs, or raise taxes. With a split Congress, neither are likely to happen.
"[W]hile we needn't panic over budget deficits, a lower deficit would really help with economic management right now. But it isn't going to happen," Krugman said in an op-ed for the New York Times on Monday.
The Nobel economist pointed to the soaring cost of borrowing as rates rise.
So far, there's no evidence that high rates will push the economy into a recession, Krugman said, but they do pose a problem down the road for the growing mountain of US debt, which just notched $33 trillion for the first time this year.
Though Krugman doesn't believe the US is at risk for a fiscal crisis anytime soon, higher rates means it'll cost more for the US to service its debt. In 2022, servicing the federal debt cost the government $476 billion, or around 2% of national GDP. That could probably double to 4% of GDP by 2030, according to Goldman Sachs strategists.
But the Fed is unlikely to lower interest rates as officials keep a hawkish eye on inflation. Markets are pricing in an 83% chance that rates will stay at the current level or higher by June of next year, according to the CME FedWatch tool.
Meanwhile, the government can narrow the deficit by dialing back some of its welfare programs, like Social Security, or by raising taxes. Tax hikes are the more plausible solution, Krugman said, given that taxes make up between 20%-30% of US GDP, well-below that of other European nations, according to data from the Organization for Economic Co-operation and Development.
But tax increases are unlikely to happen anytime soon with Republicans in control of the House of Representatives. Policymakers have been sparring for months over spending issues, with the government narrowly avoiding a shutdown in September.
"The problem is obvious. Conservatives always want to cut taxes, especially for the rich, even though polls suggest that most Americans believe that the rich pay too little," Krugman said. "But I don't see any plausible political path to a tax increase that would make a large dent in the deficit."
Policymakers still haven't settled on a budget for the fiscal year. Congress now has until November 17 to finalize the next funding package.