US debt must be stabilized soon to avoid painful measures, says Baker Institute expert

Policymakers should understand the risks and limitations associated with choosing to continue growing federal debt, according to an expert at Rice University’s Baker Institute for Public Policy.

Credit: 123RF.com/Rice University

Jorge Barro, fellow in public finance, outlined his insights in a new issue brief, “Long-term Sustainability of U.S. Government Debt Growth,” which examines the long-term macroeconomic consequences of unbalanced federal debt growth.

“The past two decades have witnessed extraordinary growth in U.S. government debt, with unprecedented escalation forecast in the coming decades,” Barro wrote. “Only 16 years from now, government debt is expected to exceed its historical peak and continue on a steep trajectory thereafter. While U.S. policymakers still have plenty of time to avoid burdensome debt accumulation levels, the cost of reaching a fiscal balance grows with every moment of delay.”

In 2018, the Treasury Department reported a total federal debt of $21.5 trillion, which is approximately the size of the entire U.S. economy as measured by gross domestic product. Federal government agencies, such as the Social Security Administration, hold around a quarter of all federal debt, reducing net public obligations to 77% of GDP. Since the federal government’s net debt position reflects the share of government securities sold in financial markets, it is the relevant measure for determining the economic impact of government debt growth, Barro said.

Long-term projections show that debt growth is expected to continue indefinitely. Over the next 30 years, the Congressional Budget Office expects government debt to once again double, growing to 147% of GDP. Although this forecasted value is more than 40 percentage points above its historical peak in 1946, evidence suggests federal debt growth in this economy may look very different than it did nearly a century before, Barro said.

Over the next several decades, domestic and international savings are likely to grow by enough to absorb the entire projected federal debt growth, limiting any crowding out of domestic private investment, Barro said. “Any potential change in foreign national savings seems small relative to private savings, suggesting that external risk factors pose a minimal threat to domestic capital market stability,” he wrote.

“The biggest long-term threat to debt sustainability is its own repayment,” Barro wrote. “Without fiscal stabilization, just the growth in interest payments alone over the next few decades would increase government outlays by an amount equal to roughly half of all personal income tax revenue.”

Barro concluded, “The fact that government debt growth has not yet delivered noticeable harm to the U.S. economy does not imply that debt can continue growing inconsequentially. Eventually, all existing debt must be repaid with interest. As these debt outlays rise, fiscal austerity becomes more urgent, and market behavior will eventually begin reflecting that anticipation. Consequently, the benefits of debt stabilization are better incurred sooner rather than later.”