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Rising government debt in the long run could lead to a spiraling financial crisis or a more gradual but still damaging erosion in the U.S. economy from inflation or loss of international confidence in the dollar, the nonpartisan Congressional Budget Office said Thursday.
“Debt that is high and rising as a percentage of GDP boosts federal and private borrowing costs, slows the growth of economic output, and increases interest payments abroad,” the CBO said in its annual long-term budget outlook, a report that extrapolates current law and budget forecasts out 30 years in the future.
The CBO said that the budget deficit – the annual shortfall between what the government spends compared to what it takes in – was projected to be about 10.3% in proportion to the size of the economy in 2021, the second-highest since 1945. However, it would fall as the economy recovered from the coronavirus pandemic before rising in later years and hitting 13.3% in 2051.
The federal debt held by the public would continue to creep up in relation to the size of the economy, the CBO said. It would reach a record 107% in 2031, the agency said, and almost double to 202% by 2051.
The report came while Capitol Hill lawmakers are debating a $1.9 trillion economic stimulus and relief package to offset the impact of the coronavirus pandemic on the economy. Democrats say the spending is needed, while Republicans say it is poorly targeted and too generous.
“Persistently rising debt as a percentage of GDP would also pose significant risks to the fiscal and economic outlook, although financial markets currently do not reflect
those concerns,” the CBO said in the report.
In particular, it warned of two risks – a fiscal crisis, “a situation in which investors lose confidence in the U.S. government’s ability to service and repay its debt, causing interest rates to increase abruptly,” and a more gradual deterioration in the economy, including “expectations of higher rates of inflation, an erosion of confidence in the U.S. dollar as an international reserve currency, and more difficulty in financing public and private activity in international markets.”
The CBO said not all effects of higher debt were negative, noting higher interest rates caused by more debt could boost savings and give the Federal Reserve more maneuvering room for monetary policy.
“Policies that increase deficits can provide support to the economy during
challenging times, such as the current pandemic,” it said.
