The Congressional Budget Office (CBO) projects that the national debt will double by 2051 if the current level of public spending in the U.S. continues. The main culprits for the increase in the debt are rising health care costs and interest services on the debt.
The current federal debt, according to the CBO, is equivalent to 102% of GDP. The U.S. had only reached these debt levels after World War II, when federal spending soared.
Growth in the economy is expected to average 1.8% over the next few decades, up 0.2% from September forecasts. On the other hand, the 70-year average growth in the U.S. economy is 3.1%.
Low tax collections are also responsible for the growing debt. Currently, the federal government’s tax revenue is 16.3% of GDP, and according to CBO projections, this percentage is expected to grow to 17% by 2025.
Although the U.S. incurred growing deficits prior to the pandemic, the COVID-19 response represented the largest expansion of government spending ever, surpassing even the 2009 stimulus due to the sub-prime crisis.
“The risk of a fiscal crisis appears to be low in the near term, despite the higher deficits and debts stemming from the pandemic,” the CBO says. “However, much higher debt over time would increase the risk of a fiscal crisis in the coming years,” it reiterated.
Budget deficits will widen from 5.7% in 2031 to 13.3% of GDP. These deficits are mainly driven by the cost of debt service. Indeed, according to the CBO, spending on interest payments will triple over the next two decades, and the cost of programs such as Medicare and Social Security will also grow.
Currently the net cost of interest payments on the debt is equivalent to 1.6% of GDP, but over the next few decades interest costs could rise to 8.6% of GDP. The yield on 10-year Treasury bonds (which influences borrowing costs in the economy) has risen to pre-pandemic levels at 1.6%. In that sense, the CBO expects that by 2031 it will grow to 3%, and from there it will continue to grow until totaling an interest rate of 4.9%.
Some economists are concerned that the new stimulus plan could cause inflation by eroding the value of Treasury bonds, which would force the Fed to raise interest rates (making debt service even more expensive).
Janet Yellen, the Treasury Secretary, defended Biden’s stimulus plan, although in the past, she opposed running large deficits.
Another factor that will contribute to the rising cost of debt is low federal revenues. It declined to 16% of GDP in 2021, down from 16.3% in 2020. However, revenues are expected to increase to 17% by 2025.
Although the United States is far from a fiscal crisis, the truth is that if it fails to decrease spending on its federal programs, or if taxes are increased, in less than a generation Americans will see more of their tax dollars going to pay interest on a large debt, rather than investment to improve their quality of life.