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Goldman Sachs sees red ink everywhere, warns US spending could push up rates and debt levels

• https://www.cnbc.com

Goldman Sachs sees a tidal wave of red ink — and it may drag the U.S. economy into its undertow.

Federal deficit spending is headed toward "uncharted territory," the firm said on Sunday, suggesting that the Trump administration and Congressional Republicans may not be able to count on the economic boost of tax reform for very longer.

In the wake of an ambitious infrastructure plan and a budget that drew fire from virtually all sides, Goldman Sachs said in a note to clients that the federal deficit would reach 5.2 percent of U.S. growth by 2019, and would "continue climbing gradually from there."

The GOP is counting heavily on the fiscal stimulus provided by tax reform—many companies have announced investment plans and doled out bonuses, even as the majority of taxpayers enjoy lower rates—to insulate them from a restive public in November. Polls suggest that Republicans may lose control of Congress, and President Donald Trump's own poll numbers hover below 50 percent in most polls.

Yet Goldman Sachs warned that the economic impetus from tax reform may have diminishing returns after this year. "The fiscal expansion should boost growth by around 0.7pp in 2018 and 0.6pp in 2019, but will likely come to an end after that"—listing a litany of reasons why spending and debt would conspire to undermine the world's largest economy.

While tax cuts are partly responsible, Goldman stated that "projected increases in mandatory spending—this includes Social Security, Medicare, Medicaid, and income support programs—are primarily responsible" for an unsustainable surge in spending.

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