Economics 101: Will the U.S. election change the trajectory of fiscal policy?

By Eric Van Enk on October 26, 2024.

As an economist and portfolio manager, I’ve been allocating significant time analyzing the potential impact for the economy and specific sectors resulting from either a Trump or Harris win in the upcoming U.S. election. There are effectively six potential outcomes from the U.S. election on November 5th, Harris wins the presidency with Democratic house & senate, Republican house & senate or split house & senate; or Trump wins the presidency with Democratic house & senate, Republican house & senate or split house & senate. Each sector of the economy is expected to be impacted differently depending on the six potential outcomes. For example, the best-case scenario for U.S. oil companies may be a Trump victory with a Republican house & senate which would be expected to reduce regulation and remove impediments to growth. Conversely, the automobile industry could be a substantial loser from a Trump victory as he is expected to severely limit the production of automobiles in Mexico which would negatively impact profits for companies like GM. What bothers me is neither presidential candidate appears to have a plan to balance the U.S. budget.

As shown in this week’s chart, the percentage of U.S. GDP now being spent on interest payments (maintaining U.S. government debt; red line) has risen substantially in recent years to the current level of 3%. Notice the percentage of GDP spent on interest costs is now at similar levels to those experienced in the 1980’s and 90’s when interest rates were substantially higher than they are today.

This is a result of absolute and relative U.S. debt levels being much higher today than they were then. Also notice the U.S. federal budget balance as a percentage of GDP (blue line) has been going the wrong way since the late 1990’s – the last U.S. president to run a budget surplus was Bill Clinton. Notice the size of the U.S. deficit is much smaller now than it was during the depths of COVID, however, at 7.2% of GDP, it remains at a high level, especially considering the U.S. isn’t currently in a recession. Typically, government spending is increased to offset the negative impact of recessions and then decreases as the economy exits recession and begins to grow. In this way, deficits can be used as a shock absorber during times of economic weakness.

However, since the late 1990’s, we’re witnessing a phenomenon known as structural deficits – subsequent U.S. governments running deficits regardless of the strength of the economy. Structural deficits contribute to inflation and increase the amount of the budget allocated to servicing debt relative to spending on other government priorities (social programs, etc.). Just like individuals, countries can go bankrupt. Many countries have declared bankruptcy over the years, countries like Argentina have done it more than once by taking on too much debt.

As the world’s largest economy and reserve currency, the U.S. defaulting on its debt could upset the world order and would undoubtedly have a significant negative impact for the global economy.

In Canada, thankfully, we’ve been more prudent and haven’t run as large of deficits for as long as they have been in the U.S. However, the concern is that we could be heading down a similar path to the U.S. if the federal government doesn’t have a plan for running budget surpluses in the foreseeable future.

National Bank Financial – Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under licence by NBF. NBF is a member of the Canadian Investment Regulatory Organization (CIRO) and the Canadian Investor Protection Fund (CIPF), and is a wholly owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA). The information contained herein has been prepared by Eric Van Enk, associate portfolio manager and wealth adviser at NBF.  I have prepared this article to the best of my judgment and professional experience to give you my thoughts on various financial aspects and considerations.

The opinions expressed represent solely my informed opinions and may not reflect the views of NBF. The particulars contained herein were obtained from sources we believe to be reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The opinions expressed do not necessarily reflect those of NBF.

Eric Van Enk is a wealth adviser & associate portfolio manager with National Bank Financial in Medicine Hat. He is a graduate of the University of Calgary, as well as a CFA charter holder with 20 years of financial markets experience in New York, Toronto and Calgary. He can be reached at eric.vanenk@nbc.ca

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