As anticipated, the Congressional Budget Office’s (CBO) projection for the federal budget deficit for FY24 has been revised up significantly. Adjusted to exclude the effects of shifts in the timing of certain payments, the deficit will amount to $2.0tr in 2024, equal to 7.0% GDP. This is $0.4tr (or 27%) larger than in the February 2024 CBO projection.
But pressures on public spending are not confined to the US. The Eurozone general government deficit widened to 4.1% of GDP in Q4 2023. The excessive deficit procedure is set to bring the EU at loggerheads with a post-election government in France, and of course Meloni in Italy. The Italian Parliament has passed a law paving the way for a devolution of fiscal powers to regional governments, which the Italian central bank warned could add to the fiscal burden facing the country.
According to the latest assessment from the ECB, “Achieving a government debt-to-GDP ratio [for the Eurozone] of 60% by 2070 from today’s debt levels would require euro area governments to immediately and permanently increase their primary balances by 2% of GDP on average”. Moreover, additional fiscal challenges stemming from demographics, the end of the “peace dividend” and climate change, “could widen the euro area’s average fiscal deficit by approximately a further 3% of GDP.”
The excessive deficit procedure should favour Eurozone government debt over that of the US. But fiscal challenges are growing everywhere. The extent of fiscal consolidation required in France and Italy, and indeed the Eurozone as a whole, could provoke a further political backlash, playing into the hands of populists and the far right, who performed well in the recent European elections.
