Overseas Headlines- October 16, 2018

Date: October 16, 2018 

United States:

Trump’s First Annual Budget Deficit Rises to a Six-Year High

The U.S. budget deficit grew to $779 billion in Donald Trump’s first full fiscal year as president, the highest since 2012 amid tax cuts and spending increases. The budget gap for the 12 months through September was 17 percent wider than the same 12-month period a year earlier, as spending rose 3.2 percent and revenue gained just 0.4 percent, according to a Treasury Department report released Monday. The deficit as a share of total economic output was 3.9 percent in fiscal 2018, up 0.4 percentage point from the prior year. The government’s fiscal year runs from Oct. 1 to Sept. 30. The budget deficit has continued to climb in recent years, raising concerns the country’s debt load of more than $21.5 trillion will grow out of control. The Treasury reported this month that the government paid $523 billion in total interest in fiscal 2018, the highest on record. The Treasury report also comes just weeks before midterm elections in Congress and threatens to undermine a longstanding Republican argument that the GOP is a better steward of the nation’s finances. Trump frequently criticized his Democratic predecessor Barack Obama for running up the deficit, and in 2012 recommended banning lawmakers from reelection if Congress couldn’t balance the budget. But the Congressional Budget Office, a nonpartisan arm of Congress, forecasts government spending will outweigh revenue by $973 billion in fiscal 2019 and more than $1 trillion the next year. That would be the first time the deficit exceeds $1 trillion since 2012, when the American economy was still recovering from the Great Recession. Republican tax cuts, increased federal spending and an aging population have contributed to the fiscal strains, though the GOP says tax reform enacted this year will spur economic growth and lift government revenue. Corporate income-tax receipts fell 31 percent in fiscal 2018 while individual income taxes gained 6.1 percent, according to Treasury data.



The Minimum Cost of Ending Austerity in the U.K: $25 Billion

Britain needs an extra 19 billion pounds ($25 billion) a year if Prime Minister Theresa May is to fulfill her pledge to end austerity, a leading think tank claimed. That’s the amount required by 2023 to increase spending on health, defense and aid, as the government has promised, without inflicting real-terms cuts on other departments, the Institute for Fiscal Studies said in a report highlighting the challenges facing Chancellor Philip Hammond as he prepares for his budget on Oct. 29. Even such as minimal definition of ending austerity would still leave billions of pounds of welfare cuts working their way through the system, the IFS said in its Green Budget Tuesday. And Hammond would need to impose “significant” tax rises, or see stronger-than-expected economic growth, to keep alive his hopes of eliminating the budget deficit by the middle of the next decade. The deficit has fallen from almost 10 percent of output in the aftermath of the financial crisis to less than 2 percent in the last fiscal year, but the squeeze has left public services under strain, hit pay packets and lifted tax to its largest share of the economy since the 1980s. Hammond’s problem is there is no public appetite for further spending cuts but many Conservatives, who have traditionally considered themselves the party of low tax and small government, are opposed to raising the burden of taxation any further. The decision over spending into the next decade “will probably be the biggest non-Brexit related decision this chancellor will make,” said Paul Johnson, director of the IFS. “This is going to be the toughest of circles to square.” The IFS dismissed the idea of a “dividend” from Britain leaving the European Union, saying net savings on budget contributions to the bloc could be less than 1 billion pounds by 2023 and more than offset by new spending on administration such as border security. One way to raise revenue would be to increase taxes on better-off members of the older generation, it said.



China May Have $5.8 Trillion in Hidden Debt With ‘Titanic’ Risks

China’s local governments may have accumulated 40 trillion yuan ($5.8 trillion) of off-balance sheet debt, or even more, suggesting further defaults are in store, according to S&P Global Ratings. “The potential amount of debt is an iceberg with titanic credit risks,” S&P credit analysts led by Gloria Lu wrote in a report Tuesday. Much of the build-up relates to local government financing vehicles, which don’t necessarily have the full financial backing of local governments themselves. With the national economy slowing, and a Beijing-set quota for issuance of local-government bonds not being enough to fund infrastructure projects to support regional growth, authorities across the country have resorted to LGFVs to raise financing, according to S&P. That’s left LGFVs “walking a tightrope” between deleveraging and transforming their businesses into more typical state-owned enterprises, the S&P analysts said. Rising vulnerabilities among LGFVs occur against a backdrop of a record pace of defaults this year in China, which has sought to roll back a decades-old practice of implicit guarantees for debt. The focus on funding to sustain growth at the local level echoes a broader shift in the central government, which last year was focused on reducing leverage in the financial system. That phase is essentially over, thanks in part to an escalating trade war with the U.S., according to Citigroup Inc. analysts. “The markets are right, in our view, to feel more concerned about the sustainability of China’s debt and the increased financial risks,” said Liu Li-Gang, chief China economist at Citigroup in Hong Kong. He also saw “renewed pressure” on the yuan. Even with the central government’s shift toward stimulus, however, S&P sees Beijing determined to “bring discipline to the financing practices of local governments and their LGFVs.” That ultimately may mean local authorities aren’t fully able to keep LGFVs afloat, however, and the bottom line is “the default risk of LGFVs is increasing.”