The Consequences of a Large and Growing National Debt


Thursday June 25th, 2015   •   Posted by Craig Eyermann at 6:42am PST   •  

Congressional Budget Office

Congressional Budget Office

What are the consequences of a large and growing national debt?

Believe it or not, the Congressional Budget Office directly addressed that question in its 2015 Long-Term Budget Outlook:

How long the nation could sustain such growth in federal debt is impossible to predict with any confidence. At some point, investors would begin to doubt the government’s willingness or ability to meet its debt obligations, requiring it to pay much higher interest costs in order to continue borrowing money. Such a fiscal crisis would present policymakers with extremely difficult choices and would probably have a substantial negative impact on the country. Unfortunately, there is no way to predict confidently whether or when such a fiscal crisis might occur in the United States. In particular, as the debt-to-GDP ratio rises, there is no identifiable point indicating that a crisis is likely or imminent. But all else being equal, the larger a government’s debt, the greater the risk of a fiscal crisis.

Even before a crisis occurred, the high and rising debt that CBO projects in the extended baseline would have macroeconomic effects with significant negative consequences for both the economy and the federal budget:

  • The large amount of federal borrowing would draw money away from private investment in productive capital over the long term, because the portion of people’s savings used to buy government securities would not be available to finance private investment. The result would be a smaller stock of capital, and therefore lower output and income, than would otherwise have been the case, all else being equal. (Despite those reductions, output and income per person, adjusted for inflation, would be higher in the future than they are now, thanks to the continued growth of productivity.)
  • Federal spending on interest payments would rise, thus requiring the government to raise taxes, reduce spending for benefits and services, or both to achieve any targets that it might choose for budget deficits and debt.
  • The large amount of debt would restrict policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or financial crises. As a result, those challenges would tend to have larger negative effects on the economy and on people’s well-being than they would otherwise. The large amount of debt could also compromise national security by constraining defense spending in times of international crisis or by limiting the country’s ability to prepare for such a crisis.

We are actually watching these dynamics play out in Greece right now, where its creditors are demanding it reduce government spending and impose even higher tax hikes—the same formula that plunged the nation into depression as a condition of its first two bailouts. According to TradingEconomics, its debt through the end of 2014 is equal to over 177% of its GDP.

Through the first quarter of 2015, the U.S. national debt stood at $18.152 trillion while the nation’s GDP stood at $17.693 trillion, which works out to be a national-debt-to-income ratio of 103%.

Under the CBO’s alternative fiscal scenario for 2015, in which they also assume that the U.S. economy will not experience any recessions in the future, the federal publicly-held debt-to-GDP ratio will reach Greece’s current level by 2043. Of course, that will be about 5 years after the nation’s total public debt outstanding will hit that level, so the CBO’s projections in this case are quite optimistic.




Facebook Twitter Youtube RSS

Search


By linking to Amazon.com from this page, Independent Institute earns referral fees of 4% to 15% from whatever you buy. Bookmark the above link and you can support the Institute when you do your normal shopping!

TIR
June 2015
S M T W T F S
« May   Jul »
 123456
78910111213
14151617181920
21222324252627
282930