CED-债务问题：将超规模美国债务负担降至GDP的70%的路线图（英）-2023.2-18正式版

COMMITTEEFORECONOMICDEVELOPMENT

THEPUBLICPOLICYCENTEROF

THECONFERENCEBOARD

SUSTAININGCAPITALISM

Aseriesfocusedonnonpartisanreasonedsolutionsinthenation’sinteresttothecentralchallengeswefaceinordertoprovideprosperityforallAmericans.

DebtMatters

ARoadMapforReducingtheOutsizedUSDebtBurden

Overview

Fiscalrestrainthasbecomeevenmoreimportant.TheUSandglobaleconomieshavebeenbatteredbytwoglobalshocks:theCOVID-19pandemicandtheRussianinvasionofUkraine.IntheUS,thesetwoshockshavecompromisedevenfurtherournation’sdeterio-ratingfiscalhealth,leavingthenationwithevenhigherdebt,highinflation,risinginterestrates,andapossiblerecession.

Debtmatters.Highlevelsofdebtcandiminisheconomicgrowth.Risingdebtservicecostswillconsumethediscretionarybudget,crowdingoutallotherpriorities;causehigherinterestratesandborrowingcostsforpublicandprivatesectors;weakeninvestment;anderodethestandardofliving.Thecombinationofhighinflation,highinterestrates,andanalreadyoutsizeddebtturninflationandrisinginterestratesintoanaccelerant,morequicklystuntingeconomicgrowthandmovingthenationfastertowardaneconomiccrisis.

Anurgentanddeterminedchangeofcoursemustbeundertakenwithoutdelay.FederalgovernmentdebtasashareofGDPhasrisento95percent—alevelnotseensinceWorldWarII—andmayexpandto185percentormoreby2052,withrisingoutlayseclipsingrevenuegrowthandswellingnetinterestpaymentsonthedebt.1Indeed,interestonthepublicdebtisalreadyrisingatanastoundingclip.OureconomyisnotpositionedasitwasattheendofWWIIwithaboomingworkforceasthetroopsreturnedhome,ahighhouseholdsavingsrate,andwartimefactorieswithunparallelednewtechnologythatcouldbeconvertedtogrowoutofthelargedebt.

Thefiscalhealthgoal:reducetheUSdebt-to-GDPratiofromthecurrent95percenttoamorestableandresponsibledebt-to-GDPratioof70percent.As

theimportantdataanalysisinthisSolutionsBriefdemonstrates,itwilltaketwotothree

decadestoresponsiblyreducethedebtandreturntoamorestableandresponsibleratioofpublicdebttoGDP(i.e.,70percentofGDP)—makingitimperativewestartnow.Timeisnotonourside.Thedebt-to-GDPratioisthemeasureofeconomicstabilitymostrecog-nizedbyinternationalfinancialinstitutionsand,althoughourdebt-to-GDPratiohasbeenmuchlower,the70percentratiofortheUSiscitedasareasonablecapbeforeoveralldebtlevelsnegativelyaffecttheeconomy.

ThefollowingSolutionsBriefexplainswhydebtmatters;howthenationaldebtcrisisisintensifyingasinterestratesriseandrecessionlooms;howlongitwilltakeandwhatitwilltake,asdemonstratedinvariousscenarios,toreducethedebt-to-GDPratiotoarespon-siblelevelof70percent;andwhatpoliciesarerecommendedtoachievethatgoalsowecanreturntothepathoffiscalhealthandstability.

Itdetailsaresponsiblefiscalpolicythatsetsusonapathofreducingourdebtburdenbykeepingdeficitsincheck,avoidingstimulus,reducingregulation,andprioritizingspendingonprogramsthatcanincreaseproductivityandgrowth.Thisapproachcancurbexcessdemand,tameinflation,bringdowninterestrates,andmakefuturedeficitmanagementanddebtreductioneasierbyreducinginterestpaymentsthroughthecombinedeffectsoflowerdebtandlowerinterestrates,thusavoidingeconomicimpactsthatcanleadtoordeepenrecessions.Mostimmediately,itarguesforraisingorsuspendingthedebtceilingtoavoidafiscalcrisis,particularlyatthistimewhentheeconomyisfragile;immediatelyestablishinganationalbipartisancommission;andfollowingaroadmapthatwillachievedebtreduction.

InsightsforWhat’sAhead

RECOMMENDATIONS

ThegoalofaresponsiblefiscalpolicyshouldbetoreducetheUSdebt-to-GDPratioto70percent.AstheanalysisinthisSolutionsBriefdemonstrates,itwilltakeatleasttwotothreedecadestoresponsiblyreducetheoutsizeddebtburdentheUShasaccumulatedoverthepastseveralyears.Togetusonthepathtoamorestabledebt-to-GDPratioof70percentandreturntofiscalhealth,theCommitteeforEconomicDevelopment,thepublicpolicycenterofTheConferenceBoard(CED),recommendsthefollowingpolicysolutionsbeundertakenimmediately:

Avertadebtceilingcrisisandbuildconsensuswithabipartisancommissiononfiscalreformanddebtreduction.Congressshouldremoveconsiderationofthedebtceilingfromalast-minute,volatilepoliticalbattlethatwillthreateneconomicrecovery.Thecurrentimpasseshouldberesolvedbyagreementtopayfordebtsalreadyincurredandlinkingthatdecisiontothecommitmenttoimmediatelyestablishabipar-tisancommissiononfiscalreformanddebtreductionwitharoadmaptoputtheUSonabindingpathtoachievingthereductionoftheUSdebt-to-GDPratioto70percent.

Makefiscalrestraintapriority.Spendingmustbecutwherepossible,itmustavoidstimulus,anditmustbefocusedtopromoteworkandproductivity(i.e.,investmentin

R&D,education,lifelongworkforcetraining,infrastructure,supportforprivateinvest-ment,etc.).Thenetsavingsnecessarytoreversethegrowthofthedebt-to-GDPratioshouldbetalliedalongsidethecostofnewspendinginbudgetbills.

ReformMedicare/healthcarepolicy.Federalhealthspendingisthebiggestlong-termdriverofcosts,andtheMedicaretrustfundisexpectedtoreachinsolvencyin2028.ReformtheMedicare/healthcaresystembygivingincentivesforconsumerstolimitcostsandforproviderstodeliverthebestresultsratherthanthemostservicesandbyfocusingonpreventionprograms.Improveefficiencyinthehealthcaresectorandmakepandemicregulatoryimprovementspermanent,especiallyintelehealth,licensing,accelerateddevelopmentoftreatments,andincreasingtheuseoftechnologyanddata.

SaveSocialSecurity.TorestoreSocialSecurityandavoidhavingitstrustfundreachinsolvency,considerbroadeningitsportfoliotoincludehigher-yieldingfinancialinstru-ments,raisingtheretirementage,institutingabroaderpayrolltaxcoverageforworkerswithhigherwages/generousfringebenefits,removingworkdisincentivesforretirees,andreducingbenefitsformorewell-offworkers.

Removebudgetgimmicksandpayfornewinitiatives.Newprogramsshouldbefullypaidforwithoutusingbudgetgimmicks;forexample,minimizingprogramcostsbybuildinginunrealisticenddates.Similarly,identifyrealbudgetsavings,notjustunspeci-fiedfuturespendingcuts.Congressmustexecuteacompleteannualappropriationsprocessaswellasanannualbudgetresolutionthattakesthedebtproblemintoaccountandusesthereconciliationprocessonlyfordeficitreduction.

Reformtaxpolicy.Increasetaxrevenuesthroughtaxreformaimedatreducingpref-erentialtreatment.Usetheopportunitytocleanupthetaxcodebystreamliningandsimplifyingtheexistingsystemandturningitawayfrompickingwinnersandlosersasitdoestoday.

Streamlineregulation.Reduceunproductiveroadblockswithoutjeopardizingsafety.Adoptpro-growthregulationsthatneitherimpedenorfavoranyparticularsector.Continuallyreviewcurrentregulatoryrequirementsthatareoutdated,redundant,orthatcreateexpensiveandnonproductiveactivities.

Segregatethedebt.Giventhedebtburden’soverwhelmingsizeandthededicatedtimeneededtoallayit,Congressshouldalsoconsideraddressingitinsegments;thatis,addressingpandemicdebtasafirst-orderpriorityandseparatingoutthelargeincre-mentaladditiontothepublicdebtresultingfromtheCOVID-19pandemic:roughly$5.3trillionfromspecificreliefbills,plusabout$1.3trillionfromeconomiclosses.

Developarealisticenergytransitionpolicy.Thetransitiontocleanenergywillrequireadditionalinvestmentandtransitioncoststhatwillneedtobecompatiblewiththedeficitanddebtreductiongoals.Toavoideconomicdisruption,strategicallyplanwiththeprivatesectorforarealistic,reliableenergytransitionanddeterminethefiscaltrade-offsthatwillberequiredtoachievenet-zeroobjectives.

I.WhyDebtMatters

Thenationhasnever,inyearsgenerallycharacterizedbypeace,experiencedthedebtexplosionthatwehavehadsince1981.Thedangerofthisexplosionhasbeensidestepped,obscured,orexcusedoverthepastseveralyearsduetolowinterestrates.Buthighdebtlevels,whicharerapidlyrisingasapercentageofGDP,slowthegrowthofeconomicoutputandrecovery,loweringlivingstandardsoveraperiodofyears.PublicdebtdivertsinvestmentdollarsawayfromtheprivatesectorandtowardUSTreasurybonds,whichareusedtofinanceexistingobligationsofthegovernment,notnewprivate-sectorinitia-tives.AgrowingdebtburdencouldundermineconfidenceintheUSdollar,challengingtheUSgloballeadershiproleandmakingitmorecostlytofinancepublicandprivateactivityininternationalmarkets.Importantly,theUSfacestheriskofsovereigndebtratingsdowngradesifinvestorsloseconfidencethatthegovernmentcancontinuetofinance

thedebt.Lowerratingsmeanhigherborrowingcostsandevenmoredebtservice—compoundingthedebtproblemandtheburdenonthegovernmenttoserviceit.

Moreover,theburdenoffinancingthedebtwilllikelyfalltodomesticinvestorsasforeigninvestors—notablyfromChinaandJapan—diversifytheirportfolioholdingsawayfromUSTreasuries.Asourdebtburdencontinuestoexplode,domesticinvestorswillhavetocarrymoreoftheburden—andmoreoftherisk.

MuchoftheUSfederaldebt—over$10.7trillionofit—isownedbyUSpeopleandinsti-tutions,whohaveassumedagreaterportionofpublicdebtsincethebeginningoftheCOVID-19pandemic.Withanagingpopulationandmillionsplanningforretirement,theUShasmanywillinglendersthatcanownthedebt,includingpensionandmutualfunds.However,thiscapacityisultimatelylimited,anditalsoplacesavulnerablefixed-income,agingpopulationatriskofsufferingtheimpactofafiscalcrisis.Furthermore,themorewealthpeoplehave,themoretheymightwanttospendtodayandcontributetoinflation,whichisespeciallyimportantastheUStriestocurbinflation.

Figures1(left)and2(right)

Sources:USTreasuryandTheConferenceBoard

4 DEBTMATTERS:AROADMAPFORREDUCINGTHEOUTSIZEDUSDEBTBURDEN

Today,foreignersownanadditional$7.3trillionoftheUSpublicdebt,withChinaandJapanholdingthelargestamounts.However,theshareattributabletotheseeconomieshasdiminishedinrecentyears,inpartbecausetheirpopulationgrowthisrelativelysloworevennegative.TherestoftheworldacquiresUSdebt(orrather,dollar-denominatedassetsingeneral)byrunningatradesurpluswiththeUS.Oralternatively,theUSrunsatradedeficit,tradingawayUSfinancialassetstodoso.ForeignwillingnesstolendtotheUShasbeensubstantial.Butforeigners’appetiteforUSfinancialassetsisultimatelylimited,andhavingUSdebtownedheavilybyastrategiccompetitor,suchasChina,alsocarriesseriousnationalsecurityrisks.

Theworld’sappetitefordollar-denominatedassetsissubstantialtodayduetothedollar’sroleinglobaltradeandforeignexchange.Butdeteriorationinourfiscalposition,andespeciallypersistenthighinflation,threatensthedollar’sroleasforeignpartiesseeksaferinvestments.Thelargerthedebt,thelargertheamountofdebtserviceandthegreatertherisktolenders—bothforeignanddomestic—thatadversedevelopmentswillrenderthatdebt-serviceobligationdifficultorimpossibletomeet.

Thedebtheldbythepublichasswelledfromunder35percentofGDPattheendof2007tojustaboutequaltothesizeoftheeconomyat95percentofGDPbythethirdquarterof2022(Figure3).Thedebtisonscheduletoreachitshighestlevelsince1946(theendofWorldWarII,whenitwas106percentofGDP)by2031andriseto185percentby2052,accordingtoCongressionalBudgetOffice(CBO)estimates.2

Figure3

CBOestimatesUSpublicdebttoswelltomorethan185percentby2050

Sources:CongressionalBudgetOfficeandTheConferenceBoard

Perhapsmostimportantly,thenationhasnoloomingeconomicboomdriveninpartbyanexpandingworkforcetoeasetheburdenandtogrowoutofthedebt,asitdidimmediatelyafterWWII.Instead,weareinchallengingeconomictimeswithinflationatitshighestlevelin40years,theFederalReservetryingtocooltheeconomy,andarecessionlooming.Underlyingthesecurrenteconomicchallengesarelong-termgrowthfundamentalsthatarenotfavorable.Labor-forcegrowthwasslowingevenpriortothepandemicfromtheretirementofthebaby-boomgeneration,populationaginggenerally,

5 DEBTMATTERS:AROADMAPFORREDUCINGTHEOUTSIZEDUSDEBTBURDEN

andtrendstowardlowerbirthrates.By2031,therewillonlybe3.0working-agepeople(ages15-64)perretiredperson(ages65andover)andby2041just2.8.Theseratiosarecomparedto3.7in2011and5.4in2001.Atthesametime,theshareofthetotalpopulationaged65andoverwillrisefrom17percentpresentlyto22percentadecadefromnow.Meanwhile,birthrateshavealreadyfallenfromjustabove2.0childrenperwomanadecadeagotoroughly1.8.Thisrateisexpectedtobeunchangedfortheforeseeablefuture.

Thisdauntingdemographicoutlookpointstoashrinkingnumberofpeopletosupportthetaxbaserequiredtofundexpandingannualfederalbudgetdeficitsandmountingpublicdebt,curtailingthenation’sabilitytoreduceit.TheprimarydriversofdebtgrowthpriortothepandemicwerespendingonMedicareandSocialSecurityandnetinterestonthepublicdebt.ThesepressuresontheUSfiscalsituationareintensifyingasmorebabyboomersretire,interestratesrise,andSocialSecurityandMedicaretrustfundsapproachinsolvency.3

Figures4(left)and5(right)

Entitlementprogramoutlaystoexpandahead

Federaloutlayswillrise

fasterthanrevenues

Sources:CongressionalBudgetOfficeandTheConferenceBoard

Whileitisdifficulttoknowwhenandhowafiscalcrisismayeruptfromexcessivedebt,thecrisisintheUnitedKingdomlastfallandthecountry’ssubsequentpronouncedrecessionisastarkwarningthatacollapseofconfidencemaycomesuddenlyatatimewhentheUSmaynotbeprepared.

II.Inflation,RecessionIntensifyingTheNationalDebtCrisis

Debtmustbeserviced,andservicingthedebtisalreadyoneofthebiggesttroublespotsinthenationalbudget,withnetinterestprojectedtobethefastest-growingpartofthebudget.USinflationreached40-yearpeaksin2022inthewakeofthepandemicandthewarinUkraine.TheConsumerPriceIndex(CPI)andthePersonalConsumptionExpenditure(PCE)deflator,commonmeasuresofconsumerinflation,surgedondynamicsfromthesetwo“grayswan”eventsandtheUSandglobalresponse.4

6 DEBTMATTERS:AROADMAPFORREDUCINGTHEOUTSIZEDUSDEBTBURDEN

Higherdebt—multipleshigherthanthelevelofdebtpreceding2008’sfinancialcrisis—isalreadycombiningwithhigherinterestratesin2023toincreaseinterestcostsdramati-callyinaveryshorttime(Figure6).Andwhendebtcontinuestoincrease,thedebtservicecostwillgoupanddriveinterestrateshigherduetoaweakenedcreditrating.

Figures6(left)and7(right)

NetinterestswelledwithFedratehikes Netinterestwillrisesharplyoverthedecade

Sources:CongressionalBudgetOffice,BureauofEconomic

Sources:TheConferenceBoardandCongressionalBudgetOffice

Analysis,andTheConferenceBoard

TheFed’sinterestratetighteningcycleisrampingupthepaceofincreaseindebtservice.DebtserviceasapercentageofGDPmayclimbashighas6percentbytheendof2023consistentwiththeinterestrateonthepublicdebt’stypicaltrackingof10-yearTreasuryyields,whicharerisingwithFedratehikes.

Figure8

Debtservicetogrowinshareofannualdeficits

Source:TheConferenceBoardandCongressionalBudgetOffice

7 DEBTMATTERS:AROADMAPFORREDUCINGTHEOUTSIZEDUSDEBTBURDEN

Whilethecurrentspikeininterestcostsisitselfconcerning,thegreateremergencyisthelong-runexpansionofinterestcosts.IntheCBO’smostrecent30-yearforecast,interestratesanddebtareexpectedtoriseinthelongrunaswell,drivingthesamemultipli-cativeexpansionofinterestcostsseenin2022,butoverdecades,makingnetinterestcoststhelargestcomponentofthebudgetandcrowdingoutothernationalpriorities.

Itisalsoimportanttonotethatthisforecastdoesnottakeintoaccounttheimpactofrespondingtofuturecrises,andthattheUShasexperiencedhigherdebtservicecostsinrecentmonthsthanthisforecastanticipated;furtherupdateswilllikelyshowevenhigherinterestcosts.

Ahigherinflationaryenvironment(i.e.,rateexceeding2percentyear-over-year)comparedtotheprepandemicnormislikelyheretostayforseveralmoreyears,andhighlevelsofdebtcanputthenationatriskforhyperinflation.Persistentinflationdriversincludecontinuedmillennialhousingdemand,laborshortages,deglobalizationcharac-terizedbyreorientationofsupplychainsandmanufacturingbacktotheUSortolocalesthataremoresecure(e.g.,nearshoringandfriend-shoring)butlesscosteffective,andthesteeptransitioncostsofthegreeningoftheUSeconomy.

Asdebtgrows,interestpaymentsgrow,makingdeficitsevenhigher.Thechallengeisthealreadyverylargeaccumulateddebtandtherisingcostofservicingitasinterestratesrise,compoundingtheamountofpublicdebtowedandshrinkingthebudgetresourcesavailabletoaddresstheneedsofthenationoritsabilitytorespondtoacrisis.BondsissuedbytheTreasuryregularlymatureandarerolledoverintonewbondsatprevailinginterestrates.ThisfinancialrealitymeansthattheTreasurytakesoninterestraterisk.Andimportantly,thedebtheldbythepublichasswelledfromunder35percentofGDPattheendof2007to95percentofGDPbythethirdquarterof2022(Figure3).Thiseffec-tivelyincreasestheTreasury’sexposuretointerestrateriskbyafactorof2.7timeswhatitwas15yearsago.

Further,thelastfewyearshaveshownthatinterestrateriskisaveryrealthreat;theinterestrateonthe10-yearTreasurybond,oneofthemostcommonissues,tradedatbelowa0.6percentyieldduring2020atthepandemic’slows,butroseabove4.2percentinOctober2022asthepandemicrecoverymaturedandhighdemanddroveinflationandinterestratehikesfromtheFed.

By2052,usingtheCBO’sprojections,debtservicewillhavegrownsolarge(7.2percentofGDP)thatitwilleclipseSocialSecurity(6.4percent)andMedicare(5.9percent)andcrowdoutotherfederalpriorities(Figure9).Furthermore,revenues(19.1percentofGDP)willnotbeabletopayforthesethreeitemscombined(19.5percentofGDP)evenintheabsenceofallotherspending,includingdefenseandMedicaid.5Furthermore,asinterestcostshaverisenfasterthantheCBOanticipatedinitsforecastlastyear,itislikelythatCBO’snextforecastwillshowevenfasterdebtservicegrowth.

8 DEBTMATTERS:AROADMAPFORREDUCINGTHEOUTSIZEDUSDEBTBURDEN

Figure9

NetInterestwillcrowdoutotherbudgetprioritiesanddrivehalfthedeficitby

theendofthedecade

Sources:TheConferenceBoardandCongressionalBudgetOffice

InflationandrisinginterestrateswillhaveseriouslynegativeeffectsontheUS’fiscaloutlook.Whilethechallengemaybecataclysmic,itdoesnotappearimminent,providingsufficienttimeforleaderstoaddressitifwestartnow.

Theonlysolutiontothissuiteofproblemsisseriousandsustaineddeficitreductionwiththegoalofreducingthedebt-to-GDPratio.“Inflatingawaythedebt”doesnotworkbecauseofthenaturaltendencyofinterestratestoadjusttoreflectinflation.6AstheUSregularlyrollsitsdebtovertonewinterestrates,thereisonlyabriefperiodoftimebeforeinflationbecomesembeddedinfutureexpectationsandfactoredintoborrowingcosts.Debtwillthengrowexponentiallyinnominaltermsevenasthevalueofthedollarerodes.Holdinginterestratesbelowtheirnaturallevelstomakedebtmoremanageablewouldalsofail.Inanenvironmentwhereinflationexpectationsarealreadyelevated,lownominalinterestratesareevenlowerinrealterms.Aninappropriateuseofloosefinancialconditionsinatimeofalreadyhighaggregatedemandwouldonlyencourageinvestorsandconsumerstospendfaster,acceleratinginflation.

GettingToFiscalHealth—ReduceTheDebt-To-GDPRatioTo70Percent

JustasbothoutlaysandrevenuescanbemeasuredasapercentageofGDP,sotooisitpossibletomeasureprogressindebtanddeficitreductionbybringingdownthenationaldebtasapercentageofGDP,ameasureusedbytheInternationalMonetaryFund(IMF).Usingthismeasureofprogresscaptureshowcountrieswithlargerdebtsaremoreexposedtoariseininterestratesastheirbondsmatureandarerolledoverintonewonesathigherrates.

TheIMFrecommendedthattheUSreducetheratio,7astepthatwouldbringhighernationalincomeinthefutureandlowerinterestpaymentsontheremainingdebt,and

9 DEBTMATTERS:AROADMAPFORREDUCINGTHEOUTSIZEDUSDEBTBURDEN

wouldlikelyencouragegreaterprivateinvestmentaswell.Choosingatargetforasustainableratiowillalwaysremainajudgmentcall,butexamplesfrominternationaltreaties,therecentpast,andeconometricanalysiscaninformthatjudgment.

FiscalpolicyintheEuropeanUnion,firstadoptedintheMaastrichtTreaty,limitedgovernmentdebtto60percentofGDP,asaconditionformemberstatesjoiningtheeuro.8Inmanypostwardecades,upuntilrelativelyrecently,theUSexperiencedlevelsofdebtheldbythepublicoflessthan40percentofGDP.Economistswhohaveanalyzedthedebt-to-GDPratiohavefocusedoncomparisonsacrosscountriesforsignsofahighdebtburdenreducinggrowth.AWorldBankanalysisfinds77percentasthethresholdatwhichdebtbeginstoimpedeeconomicgrowthindevelopedcountries.9

Forthepurposesofthisanalysis,TheConferenceBoardmodeledpoliciestoreturntheUStoapublicdebt-to-GDPratioof70percent,roughlyinthemiddleofthisreferenceframe.Figure10showstheresultofTheConferenceBoard’seconomicforecastinganalysisofvariousscenariosoftaxratehikesandoutlaycutsthatcanpushdebttoGDPto70percent(andlower)within10,20,and30years.ThelesstheUScutsoutlaysandraisestaxrates,thelongerittakestogetto70percent.Butthedeterminingfactoristhelevelofpainoreconomicdisruptionthatisrequiredandcanbesustained.

Whileitcanbeeasytoexpanddebtrapidly,especiallyduringacrisis,aplanfordebtreductionwilllikelyneedtobemoredeliberate,sustained,andgradual.Overthelongrun,individuals,firms,andgovernmentagenciescanplanaroundtaxincreasesorspendingreductions.Butsuddenandlargelossesofincomecancreaterecessionsbyleavingeconomicactorswithlessmoneytospendongoodsandservices.Andplanningforalargetemporarytaxincreaseorspendingreduction,ratherthanagentlerbutsustainedone,isboundtobemoredisruptiveandwasteful.

Doingnothingisnotanoption.However,asthefollowinganalysisdemonstrates,itwouldrequireasubstantialrealignmentoffiscalpolicyandamultidecadeplantoreturndebtto70percentofGDP,amorestablecapthantheratiotodayandthoseprojectedinthefuture,butstillsignificantlyabovethemuchlowerlevelsbeforethe2008financialcrisis.

Figure10demonstratesthefollowing:

JustraisingtaxestocutthedebttoGDPisnotfeasible,notonlybecauseitconsumesprivateinvestmentcapacity,butalsobecausetheinterestonthedebtkeepsrising.Inthismodel,alltaxrateswouldhavetoberaisedby4.5percenttogetto70percent.Still,it’snotenoughbecausetherisingnetintereststartsoutpacingtheeffectofthetaxhike.Consequently,outlaysalsoneedtobecut.

Justcuttingoutlayswouldworktoachievetheobjective,butitwouldhavetobebyalmost25percentyearafteryear,whichisdraconian.

PublicdebttoGDPcanbeloweredto70percentin10years,butitwouldinduceamajorrecessioninthenearterm.Butby2032,long-rungrowthwouldbehighestunderalowerdeficit.

Thegoalcanbeachievedin20or30years,withsmallertaxhikesandspendingcuts,andsmallerrecessions.

10 DEBTMATTERS:AROADMAPFORREDUCINGTHEOUTSIZEDUSDEBTBURDEN

Figure10

Reachingdebtof70percentofGDPunderdifferentpolicyscenarios

Sources:CongressionalBudgetOfficeandTheConferenceBoard

ToolforDebtReduction

Clickonthislinktoafilethatallowsyoutocreatedifferentscenariostoachievea70percentratioofdebttoGDPbyadjustingthetaxrateandoutlaycuts.

Thejourneytofiscalhealthisanimperativeanditmuststartnow,giventhatthemostfeasibletimeframeis20to30yearstorestoreadebt-to-GDPratioof70percent,withtheleastdraconianfiscalhardship.

11 DEBTMATTERS:AROADMAPFORREDUCINGTHEOUTSIZEDUSDEBTBURDEN

OnewayforaneconomytoreducedebtasapercentageofGDPoverthelongerrunistoensurethatdebtgrowsataslowerpacethanGDPdoes.However,thisstrategywillstillrequiremajorandsustainedchangestocurrentpolicyoverthenexttwotothreedecades.CBOprojectsinterestratesonthedebtmayexceedtherateofGDPgrowthincomingdecades.10Undersuchconditions,evenabalancedprimarybudget(thatis,thebudgetexcludinginterestcosts)wouldbeinsufficienttocontaindebtasapercentageofGDP;GDPwouldgrowataslowerexponentialratethandebt.IntheeventofinterestcostsexceedingGDP,aprimarysurplus—thatis,asurplusatleastexcludingnetinterestcosts(asituationtheUSlastenjoyedinthelate1990s)—wouldbenecessary.

IV.SolutionsTowardFiscalResponsibility

Thedeteriorationofourfiscalconditionistheresultofyearsofinattentionordismissaloftheproblem,andfixingitwillnotbetheworkofamomentbutoftwotothreedecades.Wemuststartnow.Togetusonthepathtoamorestabledebt-to-GDPratioof70percentandreturntofiscalhealth,CEDrecommendsthefollowingpolicysolutionsbeundertakenimmediately:

Avertadebtceilingcrisisandbuildconsensuswi