CBO chief Phillip Swagel alerts that high growth rates won't alone curb U.S. debt, which is projected to reach 120% of GDP by 2036.
The Congressional Budget Office (CBO) has painted a sobering picture of the U.S. fiscal landscape. As of now, the gross U.S. debt stands at approximately $40 trillion, with publicly held debt constituting an alarming 100% of the nation’s GDP. Under current trajectories, this debt-to-GDP ratio is expected to soar to 120% by 2036, raising significant concerns for policymakers and investing-in-stocks-a-better-choice-than-homebuying/">economists alike.
During a recent conference held by the Minneapolis Fed, CBO Director Phillip Swagel expressed skepticism regarding the notion that robust economic growth could independently stabilize U.S. debt levels. He stressed that a combination of substantial revenue increases and spending adjustments is vital.
While stronger economic performance tends to increase federal revenues through enhanced tax collections, it is crucial to consider that higher levels of federal spending can simultaneously contribute to economic growth while escalating expenditures in areas such as Social Security. Additionally, a thriving economy can lead to increased interest rates, further embellishing the costs associated with servicing the national debt.
As Swagel noted, "So growth will help, but it’s probably not plausible that growth alone will stabilize our fiscal trajectory." This statement underscores the inherently political nature of decisions regarding revenue generation and spending priorities.
In a back-and-forth exchange at the conference, Minneapolis Fed President Neel Kashkari raised the question of whether advancements in artificial intelligence (AI) could catalyze higher levels of economic growth. Swagel acknowledged that the CBO has recognized an increase in total factor productivity, which evaluates the efficiency of labor, capital, and other inputs in the economy. However, he remained cautionary, pointing out that even if AI introduces growth into the economy, it may not be sufficient to bridge the existing fiscal deficit.
When prompted about the specific growth rates needed to stabilize federal debt, Swagel indicated that under normal interest rates of 4% to 5%, nominal GDP growth would have to reach 7% to 8%, with real GDP growth soaring to between 5% and 6%. Currently, the economy is growing at a much slower pace, with the latest figures indicating a real GDP growth rate of approximately 2.2% for the second quarter.
Swagel's estimates starkly contrast with those of Treasury Secretary Scott Bessent, who recently claimed that a 3% growth rate would suffice to mitigate the debt issue. Bessent asserted this at an event at Southern Methodist University, describing the underlying economy as promisingly strong and poised for recovery after extraneous events like geopolitical tensions.
However, the Penn Wharton Budget Model suggests a more moderate growth requirement, estimating that a sustainable growth rate of 3.5% to 4% over the next decade is needed to merely maintain the current debt-to-GDP ratio.
Swagel emphasized the dangers of a sudden economic shock that causes interest rates to spike. This scenario could create a vicious cycle of escalating deficits, feeding back into mounting debt and perpetuating further interest rate increases. He likened this dynamic to a “turbocharger,