Congressional Budget Office Director Phillip Swagel said faster economic growth is unlikely to keep U.S. debt in check, even if GDP expands at more than double its current pace.
Gross debt is now $40 trillion, and publicly held debt is 100% of GDP. Just keeping that ratio flat, let alone bringing it down, would require a massive, sustained boom. For now, CBO see the debt-to-GDP ratio soaring to 120% by 2036.
During a Minneapolis Fed conference on Thursday, Swagel said stronger economic growth will help by bringing in more revenue for the federal government, but it’s not that simple.
Federal spending also boosts growth, which lifts wages that in turn affect outlays on Social Security benefits, he pointed out. A robust economy also tends to send interest rates higher, which adds to debt interest costs.
“So growth will help, but it’s probably not plausible that growth alone will stabilize our fiscal trajectory,” Swagel added. “So then we’re left with changes in revenues and changes in spending, and those are inherently political choices.”
Minneapolis Fed President Neel Kashkari asked if AI can help supercharge economic growth, and he replied that CBO has detected an increase in total factor productivity, which measures the efficiency of labor, capital, and other inputs.
The CBO’s next batch of economic forecasts due early next year will incorporate its views on AI, Swagel said, adding that future growth will be stronger. Still, the budget deficit is so deep that even the extra AI-powered growth won’t be enough, he warned.
Kashkari then asked how much faster growth would have to be in order to stabilize the debt. Swagel cautioned against doing arithmetic on the fly but offered some back-of-the-envelope numbers.
Assuming interest rates of 4%-5%, he estimated that nominal GDP growth would have to reach 7%-8% and real GDP growth would have to hit 5%-6%.
That’s more than double the latest real GDP pace of 2.2% in the second quarter. Meanwhile, even bullish Wall Street forecasts put full-year GDP growth at 2.5%.
The rough numbers from the CBO chief also far exceed what Treasury Secretary Scott Bessent said would be needed to overcome the debt.
“With 3% growth, we grow our way out of this,” he said at Southern Methodist University last month. “We’ll get to the other side of this Iran conflict, and the underlying economy is very, very strong, and I think reaccelerating.”
Meanwhile, other estimates fall somewhere in between. According to the Penn Wharton Budget Model, growth would have to average 3.5%-4% over a decade to maintain the debt-to-GDP ratio.
Jemal Countess/Getty Images for the Peter G. Peterson Foundation
Swagel also noted that an economic shock that sends interest rates up suddenly would set off a vicious fiscal cycle.
“So there’s almost like a turbocharger,” he explained. “An interest rate shock feeds into the deficit, feeds into the debt, feeds back into interest rates.”
So far, the bond market is absorbing all the debt the U.S. Treasury is issuing to fund the budget deficit, but long-term yields have surged to the highest levels in 24 years.
Some of that is due to the strong economy, expectations for Fed rate hikes, high oil prices keeping inflation high, and the flood of AI hyperscaler debt competing for bond market demand.
But the enormous scale of U.S. debt is also a factor. Swagel said it’s small now, with a 1-percentage-point increase in the debt ratio leading to a 0.015-percentage-point hike on long-term interest rates.
“So it’s modest, but the fiscal trajectory is really quite challenging,” he added. “It adds up, and of course there’s that turbocharger type effect that I mentioned where it feeds back into deficits.”
During a recent conference held by the Minneapolis Federal Reserve, Congressional Budget Office (CBO) Director Phillip Swagel discussed the future of U.S. debt and the challenges of managing it amid economic growth. He emphasized that even with accelerated growth in Gross Domestic Product (GDP), the rising U.S. debt, which currently stands at $40 trillion and represents 100% of GDP, is unlikely to stabilize without significant policy changes. Swagel projected that the debt-to-GDP ratio could escalate to 120% by 2036 if current trends continue.
While stronger economic growth would increase federal revenue, Swagel cautioned that this alone would not be sufficient to manage the fiscal trajectory of the nation. He explained that federal spending not only contributes to economic growth but also affects outlays on social programs like Social Security. Additionally, a robust economy typically leads to higher interest rates, which would increase the costs associated with servicing the national debt.
Swagel noted that while growth is beneficial, relying solely on it to stabilize the fiscal situation is unrealistic. He pointed out that managing the debt will ultimately involve complex political decisions regarding revenue changes and spending cuts. His remarks reflect a growing concern about the sustainability of U.S. fiscal policy, particularly in light of the large deficits the government is running.
During the discussion, Minneapolis Fed President Neel Kashkari inquired about the potential impact of artificial intelligence (AI) on economic growth. Swagel acknowledged that the CBO has observed an increase in total factor productivity, indicating improved efficiency in the economy due to better utilization of labor and capital. The CBO plans to incorporate its projections regarding AI’s impact on future growth in its upcoming economic forecasts. However, Swagel remained cautious, warning that even potential gains from AI may not be enough to alleviate the deep budget deficit.
Kashkari further probed into the extent of economic growth needed to stabilize the debt. While Swagel refrained from providing precise calculations, he shared rough estimates suggesting that nominal GDP growth would need to reach 7-8%, with real GDP growth at 5-6%. These figures are significantly higher than the current real GDP growth rate of 2.2% observed in the second quarter and exceed optimistic Wall Street predictions of 2.5% for the full year.
Contrastingly, Treasury Secretary Scott Bessent had previously claimed that a growth rate of 3% would be sufficient to navigate through the fiscal challenges. His assertion was predicated on the belief that the economy would recover and strengthen in the wake of geopolitical events like the Iran conflict.
Estimates from the Penn Wharton Budget Model suggest that maintaining the debt-to-GDP ratio would require an average growth rate of 3.5-4% over the next decade, indicating that while some forecasts are more optimistic, Swagel’s projections highlight a more challenging fiscal environment.
Swagel also warned of the risks associated with sudden economic shocks that could lead to abrupt interest rate increases, potentially triggering a vicious cycle of higher deficits, increased debt, and further interest rate hikes. He likened this dynamic to a « turbocharger, » where rising interest rates exacerbate fiscal issues.
Currently, the bond market is managing the debt issued by the U.S. Treasury, but long-term yields have reached their highest levels in 24 years. Several factors contribute to this situation, including strong economic performance, anticipated interest rate hikes by the Federal Reserve, high oil prices, and increased competition for bond market demand from AI-related borrowing.
Despite the current manageable scale of U.S. debt, Swagel highlighted that even minor changes in the debt ratio can lead to noticeable increases in long-term interest rates. For instance, a 1-percentage-point increase in the debt ratio corresponds to a 0.015-percentage-point rise in long-term rates, suggesting that while the immediate impact may appear modest, the long-term fiscal trajectory poses significant challenges.
In conclusion, Swagel’s insights at the Minneapolis Fed conference underscore the complexities of U.S. fiscal policy and the limitations of relying solely on economic growth to address the burgeoning national debt. As the country grapples with a significant debt burden, the need for strategic policy decisions regarding revenue and spending becomes increasingly critical. The interplay between economic growth, interest rates, and fiscal health will require careful management to avoid exacerbating the challenges facing the U.S. economy in the years ahead.
