The United States Congressional Budget Office has warned that US public debt will double the size of its GDP by 2050 if current spending trends continue. This ballooning debt is expected to be fueled by increased relief spending by the Federal Government due to the coronavirus.
The CBO warns that even though the economic effects of COVID-19 are likely to go away over the next year or so, the deficit occasioned by a slow economy and government-led stimulus programs will have a long-term effect on US debt.
According to estimates released by the nonpartisan congressional body, US public debt will increase to 98% of GDP this year alone and to 104% of GDP by 2021. Current deficits in federal spending have pushed the United States to record debt levels too.
The highest public debt recorded was after the Second World War where it stood at 106% of the GDP. It’s looking very likely that this record will break over the coming two or three years if nothing changes as far as fiscal policy goes.
Despite this, it’s expected that interest rates will remain low for the foreseeable future even as the economic devastation of the COVID-19 pandemic continues to bite. This will in turn keep the cost of borrowing low, albeit continued federal deficits will increase the cost of servicing the loans dramatically.
The CBO is also estimating that government spending will increase massively in the coming years. According to its report, federal spending is expected to jump from 21% of GDP in 2019 to roughly 31% by the year 2050.
The debate about government debt and federal spending is often one of the most divisive issues in the US. On one hand, some people believe that a government must only spend within its means.
In other words, all federal spending must be based entirely on revenues collected in the form of taxes. However, there’s always a theory that reduced government spending could have massive unintended consequences on the economy.
For instance, increased government austerity has been known to lead to significant job losses and reduced social security spending. All these things will have negative effects on the wellbeing of many Americans. There’s also the argument that increased federal spending could help stimulate economic growth, leading to increased job creation and wealth.
During the COVID-19 pandemic where the US has faced the worst economic devastation since the great depression, increased government expenditure on things like infrastructure could provide an important economic stimulus that finally speeds up the recovery process.
The US, however, has a legislative debt ceiling that limits the amount of debt the federal government can incur at any given time. But based on CBO estimates so far, it does seem like the ceiling isn’t nearly as effective as it should be in promoting better debt management in the federal government. But any reversal on fiscal policy during an election year is very unlikely.
