U.S. Federal public debt has risen by around 20 percentage points of GDP over the last decade, hitting a record level as a share of the economy in 2020 at the height of the Covid-19 pandemic. Though it has fallen back since, our Consensus is for the public debt-to-GDP ratio to creep up again over our forecast horizon, and political agreements over the U.S. debt ceiling are increasingly hard-won. These dynamics lead many to question — is U.S. debt sustainable?
Our Consensus Forecasts for U.S. public debt:
Our panelists see public federal debt hitting 127% of GDP by 2028, the second-highest in the G7, with our most pessimistic panelist forecasting as high as 133%, above 2020’s record. This will be a consequence of by far the widest fiscal shortfall among major advanced economies, as age- and health-related expenditures rise and the political appetite to raise taxes or restrain spending stays muted; our panelists expect the U.S. budget deficit to average around 6% of GDP in the coming years, compared to 0–3% in Canada, the Euro Area, Japan and the UK.
The U.S. economy boasts some advantages:
The U.S. can afford to run a higher fiscal deficit, and thus accumulate more nominal debt, than most other major advanced economies. One reason is that the U.S. economy is forecast to outperform in the long term, maintain real GDP growth of around 2% per year compared to around 1.5% in the UK and the Euro area. Another is investors’ perception of the U.S. government’s debt as low risk and the use of the dollar as the world’s reserve currency, which ensures sustained foreign demand for the country’s bonds.
Higher debt servicing costs beg the question: is U.S. debt sustainable?
The increase in public debt will still come at an inconvenient time: Debt servicing costs—which already more than doubled in 2023 relative to pre-Covid times—are set to rise further in the coming years due to stubbornly high bond yields. Plus, the U.S. is almost unique among major advanced economies in having a debt ceiling set at a fixed nominal figure. The upshot is that the government is unable to issue new debt to fund current spending if the U.S. debt ceiling is reached, running the risk of default. Political negotiations over raising the U.S. debt ceiling have grown increasingly fractious in recent years due to stark political polarization. The next deadline for raising the ceiling—set for January 2025—may well be missed, as already occurred last year.
In short, the U.S.’ strong growth prospects and insatiable foreign demand for Treasuries provide the economy with more fiscal breathing room than most. That said, if politicians continue to test markets’ patience by allowing public debt to rise unchecked, a debt crisis in the long term is not off the cards.
On debt sustainability, Goldman Sachs analysts said:
“Despite reasons for concern, we believe that the trajectory of the US debt condition is not a near- to medium-term threat, largely because of the established credibility and demand for US assets. Longer-term sustainability is nonetheless dependent on the enforcement of discipline on government spending and how well the US can manage increasingly complex geopolitical affairs.”
On interest rate payments, EIU analysts say:
“Bond yields will remain high in the coming years, pushing interest costs from 2.8% of GDP in 2023 to a peak of 4.6% in 2025, before easing to 3.4% in 2028 (still well above pre-pandemic levels). Although theUS is capable of meeting its debt obligations, political tensions remain a cause for concern. The debt limit will be reimposed in 2025 and is likely to remain politicised, meaning that down-to-the-wire negotiations remain a highrisk.”
The latest economic projections at your fingertips with daily forecast updates
FAQs
In short, the U.S.' strong growth prospects and insatiable foreign demand for Treasuries provide the economy with more fiscal breathing room than most. That said, if politicians continue to test markets' patience by allowing public debt to rise unchecked, a debt crisis in the long term is not off the cards.
Is rising US debt a problem? ›
Today's higher interest rate environment has magnified the issue related to growing U.S. federal government debt. While expanding debt has long been a concern, it tends to gain more attention during election years, and also at times when the government's interest costs become more significant.
How serious is the public debt situation in the USA? ›
The US Department of Treasury building seen in March 2023. US government debt is nearing $35 trillion. The high and rising level of US government debt risks driving up borrowing costs around the world and undermining global financial stability, the International Monetary Fund has warned.
What causes the public debt to increase in the United States? ›
History shows the debt-to-GDP ratio tends to rise during recessions and in their aftermath. GDP shrinks during a recession while government tax receipts decline and safety net spending rises. The combination of higher budget deficits with lower GDP inflates the debt-to-GDP ratio.
What is the reason debt has become a problem in America? ›
Tax cuts, stimulus programs, increased government spending, and decreased tax revenue caused by widespread unemployment generally account for sharp rises in the national debt.
Is the US debt unsustainable? ›
88% of them show borrowing on an unsustainable path. The US Treasury building in Washington, DC. The Congressional Budget Office warned in its latest projections that US federal government debt is on a path from 97% of GDP last year to 116% by 2034 — higher even than in World War II. The actual outlook is likely worse.
Which of the following is a reason to worry about government debt? ›
High and rising debt slows economic growth.
When did the US debt get so bad? ›
Between 1980 and 1990, the debt more than tripled. The debt shrank briefly after the end of the Cold War, but by the end of FY 2008, the gross national debt had reached $10.3 trillion, about 10 times its 1980 level.
Who owns the most US public debt? ›
Nearly half of all US foreign-owned debt comes from five countries. All values are adjusted to 2023 dollars. As of January 2023, the five countries owning the most US debt are Japan ($1.1 trillion), China ($859 billion), the United Kingdom ($668 billion), Belgium ($331 billion), and Luxembourg ($318 billion).
Which country has the highest debt? ›
Profiles of Select Countries by National Debt
- Japan. Japan has the highest percentage of national debt in the world at 259.43% of its annual GDP. ...
- United States. ...
- China. ...
- Russia.
Public Debt Crowds Out Private Investment
"As the spending is unproductive, the economy is poorer and total savings is lower due to capital crowd out." "Government spending redirects real resources in the economy and can crowd out private capital formation," they add.
What is government's biggest expense? ›
In 2023, major entitlement programs—Social Security, Medicare, Medicaid, Obamacare, and other health care programs—consumed 50 percent of all federal spending.
What would happen if the US paid off its debt? ›
Answer and Explanation:
If the U.S. was to pay off their debt ultimately, there is not much that would happen. Paying off the debt implies that the government will now focus on using the revenue collected primarily from taxes to fund its activities.
What is the true cause of our national debt? ›
The national debt is the sum of a nation's annual budget deficits, offset by any surpluses. A deficit occurs when the government spends more than it raises in revenue. The government borrows money by selling debt obligations to investors to finance its budget deficit.
What problems are caused by debt? ›
Potential impacts of money and debt stress
There's a strong link between debt and poor mental health. People with debt are more likely to face common mental health issues, such as prolonged stress, depression, and anxiety. Debt can affect your physical well-being, too.
Who does the US owe the most money to? ›
Nearly half of all US foreign-owned debt comes from five countries.
| Country/territory | US foreign-owned debt (January 2023) |
|---|
| Japan | $1,104,400,000,000 |
| China | $859,400,000,000 |
| United Kingdom | $668,300,000,000 |
| Belgium | $331,100,000,000 |
6 more rowsThe international buying appetite has been falling over the past 10 years (dropping from 40% to the current 30%). The major international owners of US debt include Japan ($1.1T), China, UK, Belgium, Switzerland, Cayman Islands and smaller amounts from the rest of the world.
What is the future of US debt? ›
Relative to the size of the economy, U.S. federal debt is larger now than at any time since the end of World War II. Under current policies, the debt is expected to climb from around 75 percent of the Gross Domestic Product today to over 120 percent by 2040, and keep growing after that.
