Governments have objectives such as keeping their people safe and secure, managing the economy, maintaining law and order, or to use the words of the American Declaration of Independence, safeguarding the inalienable rights of “life, liberty, and the pursuit of happiness – that to secure these rights, governments are instituted among men”, i.e this is what government is for. There will always be risks to the achievement of these objectives, but if they are assessed and managed at all, it seems it is behind closed doors.
The U.S. government recently reduced corporate taxes from 35% to 21% which was greeted as a huge political success and welcomed by business. The U.S. government has also increased spending sharply. This widens the gap between revenue and spending, and America’s government debt is now projected to rise from $15.5 trillion to $33 trillion over the next ten years as a result.
The annual deficit is funded by the sale of treasury bills, so the amount of revenue spent on paying interest rather than on government services will increase dramatically, even if the rate of interest itself does not rise. And it might rise if the people and countries who buy US treasury bills start to see it as less of a safe haven (demand will fall, the price – the interest rate the US pays – will have to rise to encourage buyers).
The US government does not see the escalating deficit as a problem because it assumes that the tax cuts will lead to high growth. It will just happen. Risk management involves testing assumptions. The problem with the growth assumption is 1) independent forecasters don’t think it will happen, at least not to the levels required, 2) the US population is ageing with a decreasing proportion of workers supporting an increasing proportion of retirees, 3) the government plans to restrict immigration by at least 50% so point 2 gets worse, and 4) import tariffs are planned which will raise costs for US companies which will in turn slow sales and investment that might otherwise promote growth.
At the moment, an unsustainable government debt and recession scenario seems likely within a ten-year horizon as a result of these policies. The top rates of personal tax would have to rise to 70% and 74% to try and contain that situation, and the likelihood of that happening is very remote, to the extent of being unAmerican.
So has this been worked through as a risk management exercise? Well, President Trump’s recent State of the Union address was 5,866 words long, and the words “deficit” and “debt” did not appear once.
Story source: Fortune magazine – April 2018, American Declaration of Independence – July 1776.