Even if the U.S. avoids some of the worst-case scenarios, mounting debt and the cost of servicing it could ultimately slow economic growth and make the burden unsustainable, a former International Monetary Fund official said.
Public debt, or the amount the US owes to external lenders after borrowing in the financial markets, is already around 100% of GDP, and Congressional Budget Office forecasts show that this ratio will rise to 116% in 2034, 139%. in 2044 and 166% in 2054.
While these levels seem alarming, Japan’s enormous debt burden shows that an advanced economy that borrows in its own currency – like the US – can control its red ink, wrote Barry Eichengreen, who was previously a senior policy adviser at the IMF and is now a one of the IMF’s top policy advisors. professor of economics and political science at UC Berkeley.
While the US enjoys the benefits of dollar dominance, deep financial markets and Federal Reserve support for government bonds, institutional collapse remains a threat, he wrote in an op-ed in Project Syndicate on Tuesday.
For example, he pointed to other commentators who have warned of the risk that the US will default on its debt under another Trump administration. But that is not the only threat.
“Even without this dire scenario, meeting additional interest obligations as the debt ratio rises could require the federal government to cut discretionary spending, with negative consequences for economic growth,” Eichengreen warned.
The US needs to keep up with interest payments and maturing government bonds, with the cost of servicing all that debt expected to exceed defense spending this year.
The spike in bond yields since the Federal Reserve began aggressively raising rates in 2022 has pushed up interest costs. Even Treasury Secretary Janet Yellen acknowledged in May that the prospects for higher interest rates in the long term will make it harder to keep deficits and debt levels under control.
As this spending continues to rise, the U.S. will either borrow more to pay down debt and add to the debt burden even further, or cut spending on initiatives like the Biden administration’s CHIPS Act and the Inflation Reduction Act, Eichengreen said.
“But if the cuts fall on public investments in semiconductors, quantum computing, clean energy and education, as seems likely, then the negative growth effects could be substantial,” he said. “And sharply slower growth would call into question debt sustainability.”
The warning comes a week after Nobel laureate Paul Krugman downplayed concerns about the US debt, saying there is a relatively easy way to stabilize the debt-to-GDP ratio.
He highlighted a recent study from the left-leaning Center for American Progress that estimates the U.S. would need to raise taxes or cut spending by 2.1% of GDP to achieve that.
“Given the political will, we could solve the debt problems quite easily,” he wrote New York Times op-ed. “To the extent that debt is a problem, it is a reflection of political dysfunction, especially the radicalization of the Republican Party. That radicalization concerns me greatly for several reasons, starting with the fate of democracy, and federal debt is nowhere near the top of the list. .”
This story originally appeared on Fortune.com
