Rising federal debt poses long-term economic risks to the United States, says Congressional Budget Office

Rising long-term public debt could lead to a spiraling financial crisis or a more gradual but still damaging erosion of the U.S. economy due to inflation or loss of international confidence in the dollar, said Thursday the nonpartisan Congressional Budget Office.

“High and rising debt as a percentage of GDP raises federal and private borrowing costs, slows economic output growth, and increases interest payments abroad,” the CBO said in its annual budget outlook. long-term, a report that extrapolates the law and budget forecasts 30 years into the future.

The CBO said the budget deficit – the annual shortfall between what the government spends versus what it takes in – is expected to be around 10.3% relative to the size of the economy in 2021, the second highest since 1945. However, it would fall as the economy recovered from the coronavirus pandemic before rising again in subsequent years and reaching 13.3% in 2051.

Federal debt held by the public would continue to grow relative to the size of the economy, the CBO said. It would peak at 107% in 2031, the agency said, and nearly double to 202% by 2051.

The report came as Capitol Hill lawmakers debate a $1.9 trillion economic stimulus and relief package to offset the impact of the coronavirus pandemic on the economy. Democrats say the spending is necessary, while Republicans say it is poorly targeted and overly generous.

“The continued rise in debt as a percentage of GDP would also pose significant risks to the fiscal and economic outlook, although financial markets are not currently reflecting
these concerns,” the CBO said in the report.

In particular, he warned of two risks – a fiscal crisis, “a situation in which investors lose confidence in the ability of the US government to service and repay its debt, causing interest rates to rise sharply interest”, and a more gradual deterioration in the economy, including “expectations of higher inflation rates, an erosion of confidence in the US dollar as an international reserve currency and greater difficulty in financing the public and private activity in international markets”.

The CBO said not all effects of higher debt were negative, noting that higher interest rates caused by increased debt could boost savings and give the Federal Reserve more headroom. maneuver for monetary policy.

“Policies that increase deficits can provide support to the economy
difficult times, like the current pandemic,” he said.

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