What Can We Expect From a Growing National Debt?
June 29, 2015
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.
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.
- 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.
Through the first quarter of 2015, the U.S. national debt stood at more than $18 trillion while the nation's GDP stood at some $17 trillion, which works out to be a national-debt-to-income ratio of 103 percent.
Source: Craig Eyermann, "The Consequences of a Large and Growing National Debt," Independent Institute, June 25, 2015.
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