US debt could jeopardise the expansion mandatory for sustainable development

The national debt, i.e. the quantity the United States owes to external lenders after borrowing on the financial markets, is already around 100% of GDP. According to forecasts by the Congressional Budget Office, this figure will rise to 116 percent in 2034, 139 percent in 2044 and 166 percent in 2054.

While these dimensions seem alarming, Japan’s enormous debt burden shows that a highly developed economy – just like the United States – that borrows in its own currency can get its red numbers under control, wrote Barry Eichengreen, a former senior policy adviser on the IMF and now a professor of economics and political science at UC Berkeley.

While the US enjoys the advantages of dollar dominance, deep financial markets and Federal Reserve support for Treasury bonds, the chance of institutional collapse stays, he wrote in an opinion piece in Project Syndicate on Tuesday.

For example, he referred to other commentators who had warned of the chance that the USA will not be paying its debts under one other Trump administration. But that will not be the one threat.

“Even if this dire scenario does not materialize, meeting additional interest obligations while the debt ratio rises could force the federal government to cut discretionary spending, which would have negative consequences for economic growth,” Eichengreen warned.

The United States must meet its interest payments and repair maturing Treasury bonds, with the associated fee of servicing all of that debt expected to exceed defense spending this yr.

The rise in bond yields for the reason that Federal Reserve began aggressive rate hikes in 2022 has pushed up interest costs. Even Treasury Secretary Janet Yellen acknowledged in May that the prospect of upper long-term rates of interest will make it harder to maintain deficits and debt under control.

As that spending continues to rise, the U.S. will either borrow more to repay its debt, increasing its debt burden, or cut spending on initiatives just like the CHIPS Act and the Biden administration’s Inflation Reduction Act, Eichengreen said.

“However, if the cuts affect – as is likely – public investment in semiconductors, quantum computing, clean energy and education, the negative impact on growth could be significant,” he said. “And significantly slower growth would call into question debt sustainability.”

The warning comes every week after Nobel laureate Paul Krugman downplayed concerns about U.S. debt by saying there was a comparatively easy method to stabilize the debt-to-GDP ratio.

He referred to a recent study by the left-wing Center for American Progress To achieve this goal, the United States would must increase taxes by 2.1 percent of GDP or cut spending.

“If the political will were there, we could easily solve the debt problems,” he wrote in a New York Times Opinion article. “To the extent that debt is a problem, it is a reflection of political dysfunction, particularly the radicalization of the Republican Party. That radicalization worries me deeply for a number of reasons, starting with the fate of democracy, and national debt is nowhere near the top of the list.”