Debt Danger Ahead Even Greater Than CBO Sees: Analysis

The team at Bloomberg Economics is warning that federal debt is set to grow even higher as a share of the economy than the most recent projections from the Congressional Budget Office, which see the debt climbing to 116% of GDP by 2034.

“From tax revenue to defense spending and interest rates, the CBO forecasts released earlier this year are underpinned by rosy assumptions,” Bloomberg economists Bhargavi Sakthivel, Maeva Cousin and David Wilcox write. “Plug in the market’s current view on interest rates, and the debt-to-GDP ratio rises to 123% in 2034. Then assume — as most in Washington do — that ex-President Donald Trump’s tax cuts mainly stay in place, and the burden gets even higher.”

The Bloomberg analysts ran a million simulations to assess the path the debt may take depending on the many variables in play. They say that in 88% of the simulations, the debt-to-GDP ratio was “on an unsustainable path,” which they defined as increasing over the next decade.

They also note that debt that reached 123% of GDP in a decade would result in servicing costs or almost 5.4% of GDP, which would be “more than 1.5 times as much as what the federal government spent on national defense in 2023, and comparable to the entire Social Security budget.”

The analysts note that it “would take a lot to shake investor confidence in US Treasury debt as the ultimate safe asset” and that the debt is more sustainable if judged by looking at inflation-adjusted interest expense, a measure preferred by Treasury Secretary Janet Yellen. In only 30% of Bloomberg simulations did that metric exceed Yellen’s preferred threshold of 2% of GDP.

Still, the Bloomberg team concludes that getting the debt to a truly sustainable path will take congressional action — and the prospects for that in the absence of a crisis appear remote given current partisan divisions.