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S&P: Growth in US twin deficits could curtail economic expansion

The U.S. fiscal deficit could increase by roughly 50% in two years, mostly due to tax cuts and higher spending, according to S&P Global Ratings.

Following passage of tax legislation last year and a bipartisan budget agreement this year, the country's fiscal deficit will likely widen to $991 billion by 2020, from $666 billion in 2017, S&P said in a May 18 report.

At that level, the country's fiscal deficit as a percentage of GDP would be 4.5% in 2020, up from 3.5% in 2017, the report said. The U.S. current account deficit could go up to $700 billion by 2020, from $465 billion last year, according to the rating agency.

President Donald Trump has repeatedly decried trade deficits as harmful to the U.S. economy. His administration is renegotiating the North American Free Trade Agreement and has pushed for punitive tariffs to protect some American industries.

However, protectionist policies may not address a growing current account imbalance, S&P U.S. Chief Economist Beth Ann Bovino said in a statement.

The country will also likely become more reliant on foreign capital inflows to fund its deficit, since the U.S. consistently spends more than it saves, the report noted.

"While deficits aren't necessarily bad, the debt necessary to finance the deficit may create large and persistent imbalances, increasing risks of reaching unsustainable levels," Bovino said.

If foreign demand for U.S. Treasuries weakens just as the twin deficits widen, long-term interest rates could jump, perhaps slowing the U.S. growth rate, or cutting short its economic expansion, the report also noted.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.