It’s fair to say that the US has deep fiscal challenges. There is some good news that Obama trumpets: Federal deficits are falling, and the Congressional Budget Office says the national debt promises to stay roughly stable as a percentage of GDP during the next decade. All that, coupled with fact of historically low interest rates on Treasury bonds argues against the notion of a near-term fiscal crisis.
But economists don’t view this as a time to be complacent, either.
The debt already equals a full year’s GDP, which is a very high level compared with most of US history. Many economists would prefer to see a level of 60 or even 30 percent of GDP. And without a course correction, the current path doesn’t lead there. Instead, it leads to a steady rise in debt after 2023. That’s mainly because the nation’s changing demographics push up the cost of entitlement programs such as Medicare.
If a nation’s debt keeps rising higher, it could signal an unsustainable course. The risk grows that America will lose standing as a magnet for global investment. Interest rates could rise and economic growth could slow, so that living standards grow at a slower pace. At a minimum, a high debt-to-GDP ratio leaves a nation little cushion for emergencies.
