3 Ways the Growing Budget Deficit Could Impact CRE

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The nation's debt is on an unsustainable path and must be addressed by lawmakers, Janet Yellen, former chair of the Federal Reserve, said at the conference of the National Investment Center for Seniors Housing & Care (NIC) in Chicago last fall.

The hole in the federal budget grew to $984 billion in fiscal year 2019. That's up more than $100 billion from the year before. It's the largest the budget deficit since 2012, according to the Congressional Budget Office.

“This isn't pleasant; this is painful arithmetic," Yellen said. "How do you get more revenues, or how do you spend less, and who is going to bear the burden? This is root canal economics."

Although interest rates are near historic lows, countries that carry too much sovereign debt typically face higher interest rates that ripple throughout their economies. Growing federal deficits could renew budget battles in Congress and potentially threaten programs on which commercial real estate investors depend, from Section 8 Housing Choice vouchers to low-income housing tax credits. Big deficits could also make it harder to fight future economic downturns.

Here are three ways the ballooning deficit could impact commercial real estate:

1. Borrowing growth from the future

The U.S. economy has been growing since June 2009 — its longest expansion ever — and unemployment is near its lowest level. That's usually a time for lawmakers to raise revenues, cut spending and lower budget deficits.

“Rate cuts (monetary stimulus) and deficit spending (fiscal stimulus) during a period of economic growth bring us into uncharted territory, and can be seen as borrowing growth from the future," according to Emerging Trends in Real Estate 2020, a report from the Urban Institute (ULI) and PwC.

Usually, lawmakers spend more when the economy slows down or shrinks. That would be more difficult to do if the government is already running large deficits.

The Tax Cuts and Jobs Act reduced the corporate tax rate from 35 percent to 21 percent starting in 2018. That dramatically reduced the amount of money coming to the federal government, without reducing the amount of spending, and swelled the budget deficit, which had been falling since the Great Recession.

2. Higher borrowing costs

Countries with significant debt could eventually hit a ceiling with their borrowing, as investors begin to demand higher yields on the bonds issued by debt-ridden countries — like Greece a few years ago. These higher interest rates typically ripple through a country's economy.

Just before the Great Recession, the U.S. national debt totaled a little more than a third (38 percent) of the size of the U.S. economy. Now the government's national debt totals more than $22 trillion — more the two-thirds (78 percent) of the gross domestic product. To put those figures into context, some countries are considered to be in a financial crisis if they have a debt-to-GDP ratio of 90 percent, said Yellen, who is also an economist with the Brookings Institution.

In theory, a country that borrows too much money will begin to run out of financing options. However, the global financial markets are still happy for now to buy bonds issued by the U.S. government. The yield on 10-year U.S. Treasury bonds was 1.7 percent as of mid-October 2019 – once again close to its historic low point.

3. Budget battles ahead

The growing national debt poses a threat to three large entitlement programs — Social Security, Medicare and Medicaid, according to Yellen.

These programs will total nearly two-thirds (60 percent) of federal spending in fiscal year 2020, she told her audience of seniors housing investors at the NIC conference. Many seniors housing properties — especially nursing homes — depend on government programs to pay for the care they provide.

Renewed budget battles may also once again threaten a broad array of programs that real estate investors and developers depend on, including a broad range of housing programs, from Section 8 vouchers to federal low-income housing tax credits.

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