Can the US grow its way out of the national debt problem?
|Summary
The outlook for the federal budget deficit and national debt is daunting. At present, the U.S. federal budget deficit is nearly double the long-run average and unusually large for an economy that is not in a recession or engaged in a major war.
Reducing the budget deficit via tax increases and/or spending cuts has proved politically difficult. Political developments in Washington, D.C. have time and again shown that meaningful deficit reduction is a challenging undertaking.
Could we grow our way out of the debt problem? Perhaps the least painful solution to the long-run debt situation would be faster economic growth. Both public and private sector forecasters generally believe real GDP growth will average roughly 2% over the long run, but what if they are wrong? What would the long-run fiscal outlook look like if the U.S. economy grows faster or slower than 2%?
We model three different economic scenarios for the next 10 years to derive a plausible range of outcomes for the budget deficit and national debt.
In all three scenarios, we assume the House version of the One Big Beautiful Bill Act (OBBBA) becomes law, temporary OBBBA provisions are made permanent, and tariff rates decline after the Trump presidency but remain higher than they were pre-2025.
Baseline scenario (2.1% real GDP growth and an average interest rate on the national debt of 3.7%): The federal budget deficit widens from its current value of 6.4% of GDP to roughly 8% by 2034. The debt-to-GDP ratio rises from 98% to 126%, surpassing the all-time high of 106% reached during World War II.
"Pessimistic" scenario (1.6% real GDP growth and an average interest rate on the national debt of 4.0%): The budget deficit as a share of GDP hits 10% by 2034, and the debt-to-GDP ratio surges to 140%.
"Optimistic" scenario (2.6% real GDP growth and an average interest rate on the national debt of 3.4%): The federal budget deficit remains roughly unchanged at 6.5%. The debt-to-GDP ratio continues to climb, hitting 114% in 2034, but the pace of the rise is much more gradual than in the other scenarios.
The key takeaway, in our view, is that it will take a very meaningful acceleration in real GDP over a long period of time to "solve" the unsustainable trajectory of the nation's public finances absent structural changes in revenues or outlays. To stabilize the debt-to-GDP ratio around 100%, it would likely require real GDP growth of more than 3% annually for the foreseeable future, all else equal.
Perhaps generative AI and other new technologies will lead to an economic boom that yields GDP growth rates this high. But, we would remind readers of additional downside risks to the fiscal outlook that we did not incorporate. For example, there may be unexpected developments, such as wars or natural disasters, that prompt Congress to step in with more spending than is incorporated into our projections.
Ultimately, even if real GDP growth is somewhat faster than the consensus forecast in the years ahead, we think it will still take a reduction in the primary budget deficit via higher taxes, lower spending or some combination of the two to reduce the federal budget deficit back to a more sustainable 3% of GDP.
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