In an interview with Bloomberg News, Treasury Secretary Janet Yellen highlighted the increasing difficulty in containing US borrowing needs due to the long-term forecast of higher interest rates. Yellen emphasized the importance of boosting revenue in negotiations with Republican lawmakers to mitigate the impact of rising deficits and interest expenses.

The Biden administration's budget proposals aim to ensure the nation remains on a sustainable fiscal trajectory. Yellen reiterated the significance of the ratio of inflation-adjusted interest payments compared with GDP, which witnessed a substantial increase in the past year. The White House anticipates this ratio to stabilize around 1.3% over the next decade, with Yellen expressing her desire to keep it below 2%.

However, economists at Goldman Sachs Group Inc. have projected that the ratio could surpass the 2% mark, estimating net real interest payments to reach 2.3% by 2034, according to new analysis released on Wednesday. This represents a significant shift from the bank's prediction of 1.5% made five years ago.

The surge in interest rates is primarily responsible for the worsened outlook. In response to inflation concerns, the Federal Reserve began aggressively raising rates in 2022, making it more expensive for the government to service its debt. The White House's latest annual budget proposal predicts 10-year Treasury yields to be at 3.7% in the early 2030s, nearly one percentage point higher than the 2.8% projected three years prior.

To address these challenges, Yellen emphasized the inclusion of deficit reduction measures in the budget to maintain fiscally responsible interest expenses. She also mentioned the necessity of opening up a tax negotiation, referring to the upcoming legislative battle over the tax cuts passed under former President Donald Trump that are scheduled to expire in 2025.

While Trump has advocated for extending these cuts, President Joe Biden seeks to preserve reductions only for those earning less than $400,000 annually. Yellen suggested that revenue generated from the expiration of tax cuts could be used for deficit reduction. Additionally, she mentioned the implementation of the global corporate minimum tax deal as a way to generate revenue for extended provisions.

It is important to note that Yellen stated that the US is not ready to sign the final version of the global corporate minimum tax agreement. Biden's budget, released in March, also proposes tax hikes on capital gains and on households with a net worth of at least $100 million, which Republicans oppose.

Yellen's views on where borrowing costs will settle over time have appeared to shift. Last October, she expressed the possibility of longer-term yields decreasing, citing underlying trends that had previously influenced them. Nonetheless, the focus should primarily be on keeping real net interest from rising above 2% of GDP, according to Jason Furman and Lawrence Summers of Harvard University.

In a 2020 paper, Furman and Summers argued that policymakers should consider this 2% threshold instead of solely relying on the overall debt-to-GDP ratio. Furman, former White House chief economist, noted that while the guidepost is not infallible, it is based on a combination of empirical evidence and intuition.

As the US faces the challenge of higher interest rates and increasing borrowing needs, the negotiations over tax cuts and revenue-boosting measures will play a crucial role in managing the nation's deficits and interest expenses.