July 29, 2024
AUTHOR: Aneet Deshpande, CFA, Chief Investment Officer, Executive Managing Director
————-
Tis the season for election rhetoric and the US federal budget deficit is likely to be in focus as fiscal year 2024 ends on September 30 with one side blaming spending and the other blaming tax cuts. Whoever wins the election in November will have to work with the new Congress to raise the debt ceiling (currently in place until Jan-2025) and pass a new budget for FY2025. The challenges are significant. In its most recent estimates, the Congressional Budget Office (CBO) pegs the deficit gap at $1.9 trillion.[1] According to the updated CBO projections, the federal government is on pace to run the highest peacetime deficit in American history (outside of the 2008 Great Financial Crisis and COVID-19 Pandemic).[2]

There is an ongoing narrative that somehow the US deficit woes can be solved by tightening the noose on discretionary spending, but this is not realistic. At present, discretionary spending is approximately 6.4% of GDP, which is below the 40-year average of 7.5% of GDP.[1] Mandatory spending, also known as direct spending, is mandated by existing laws and includes funding for Social Security and Medicare. For this fiscal year 2024, mandatory spending is estimated to reach 14.6% of GDP, three percentage points higher than the 40-year average.[2]
Over the last twenty years, discretionary spending has risen over 100%, while mandatory spending has increased nearly 206%, more than offsetting a 160% rise in government revenues. Of equal importance, the government’s interest costs have jumped over 450% from $160 billion in 2004 to 2024’s estimated $892 billion thanks to a larger debt burden and higher interest rates.[1] The interest burden is of note as interest expense now ranks as the second largest spending category behind spending on social security this fiscal year-to-date.[3]

The rise in mandatory outlays has been driven by entitlement programs (social security and healthcare programs) with an aging population and a retirement boom that is in full swing. There are now an estimated 68 million people receiving benefits from the Social Security Administration (SSA), representing an increase of over 20 million people since 2004.[4][5]
This is all to say that the long-term deficit conundrum will be difficult, if not impossible, to resolve absent significant changes to mandatory spending programs. With both sides of the political aisle busy blaming one another, the odds of a worsening long-term fiscal position seems to be a likely outcome—notwithstanding modest short-run improvements. This serves as part of the macro backdrop for why we believe that interest rates and inflation rates are likely to remain elevated relative to the last decade’s experience.
Perhaps most importantly for investors, our view is that there is no specific deficit or debt metric for which the alarm bells go off for markets. The closest thing to potential alarm bells we imagine would be a series of failed treasury auctions (when supply overwhelms demand) resulting in higher interest rates which would likely negatively spill over into equity markets. Until that time, we continue to pay attention to the election cycle and policy changes that may influence market behavior, regardless of deficits.
————-
[1] House Budget Committee, Congressional Budget Office Updates Baseline: Deficit Spending is 27 Percent Higher Than Previously Estimated
[2] Bloomberg LP, “Why is the US Deficit so Big? Depends on Who you Ask”, July 23, 2023
[3] https://fiscaldata.treasury.gov/americas-finance-guide/federal-spending/
[4] https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
[5] https://www.ssa.gov/oact/STATS/OASDIbenies.html
DISCLOSURES
Information provided in this article is general in nature, is provided for informational purposes only, and should not be construed as investment advice. These materials do not constitute an offer or recommendation to buy or sell securities. The views expressed by the author are based upon the data available at the time the article was written. Any such views are subject to change at any time based on market or other conditions. Clearstead disclaims any liability for any direct or incidental loss incurred by applying any of the information in this article. All investment decisions must be evaluated as to whether it is consistent with your investment objectives, risk tolerance, and financial situation. You should consult with an investment professional before making any investment decision.
YOUR FUTURE IN FOCUS
At Clearstead, we create integrated, prudent, and custom strategies that bring clarity to you or your organization’s financial future.

Clearstead is an independent financial advisory firm serving wealthy families and leading institutions across the country. As a fiduciary, it provides wealth management services and investment consulting to help clients meet their financial objectives, achieve their aspirations, and build stronger futures.
SERVICES
INSIGHTS
CONTACT US
1100 Superior Avenue East
Suite 700 | Cleveland, Ohio 44114
216-621-1090
FOLLOW US