Regardless of the outcome of November's presidential election, America’s fiscal situation is set to worsen. Net government debt has surged to 98% of GDP, up from 40% in 1990, with no substantial plans from either party to tackle it.
Globally, America had the eighth-highest net public debt-to-GDP ratio as of April, according to the IMF. While countries like Japan (158%) and Italy (129%) rank higher, America’s rapid debt accumulation and its central economic role are concerning. The IMF forecasts a 6.5% deficit of GDP for 2024, with only war-torn Israel borrowing more among advanced economies.
America’s debt issues began during the 2007-08 financial crisis and worsened after the 2020 pandemic. Previously, the debt-to-GDP ratio stabilized alongside the G7 nations. However, the IMF now projects that America’s debt will keep rising.
Debt sustainability depends on whether the economy’s nominal growth rate exceeds the interest rate. From 2008 to 2019, low interest rates kept debt servicing costs down, despite increased borrowing. High inflation from 2021 to 2023 boosted nominal economic output, shrinking the debt-to-GDP ratio. With inflation under control, this effect has diminished.
Higher interest rates to manage inflation will increase costs.
The government will spend $728 billion on debt servicing in 2024, 16% of revenues. As older debts with lower rates mature and are renewed at higher rates, servicing costs will rise. Without economic growth or lower interest rates, public debt interest will climb even without new borrowing.
Spending cuts to reduce debt will be difficult. An aging population will need more government services, and defense spending, renewable energy transition, and industrial policy will add to costs. Large deficits may prompt creditors to demand higher interest rates. While Congress has been slow to act, market forces may eventually compel it.
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