America's long-term budget outlook looks bleak. The country's leaders must change course to achieve public-debt sustainability, and to pay for the structural increases in spending that demographics, climate change, and intra- and inter-generational fairness will require.
NEW YORK – Now that the brinkmanship over the US federal debt limit has been suspended until January 1, 2025, two major, interdependent fiscal-policy challenges demand attention. First, America’s public debt must be put on a safer, more sustainable trajectory; and second, the country’s leaders need to determine the optimal size of the public sector, as measured by primary public spending (excluding interest payments) as a share of GDP.
According to the International Monetary Fund’s April 2023 Fiscal Monitor report, US general government net debt was 94.2% of GDP in 2022, compared to an average of 81.6% across advanced economies and a global average of 74.6%. While the US net debt ratio was already elevated in 2019 (83.1%), it surged to 98.3% in 2020 as COVID-19, and the policy response to it, boosted the numerator and depressed the denominator. These recent figures are not only peacetime records; they also exceed the peaks at the end of World Wars I and II, when the higher ratios were rapidly eroded by (unanticipated) inflation and growth.
Fiscal policies should ensure that the net non-monetary debt of the consolidated state (including the central bank) does not exceed the present discounted value of current and future primary surpluses, including non-inflationary seigniorage. While the Federal Reserve will generate some revenues from the issuance of base money net of any interest paid on the outstanding stock of central-bank money, the seigniorage consistent with its inflation target is likely to be less than 0.5% of GDP. Not even acolytes of Modern Monetary Theory could make these numbers work.
NEW YORK – Now that the brinkmanship over the US federal debt limit has been suspended until January 1, 2025, two major, interdependent fiscal-policy challenges demand attention. First, America’s public debt must be put on a safer, more sustainable trajectory; and second, the country’s leaders need to determine the optimal size of the public sector, as measured by primary public spending (excluding interest payments) as a share of GDP.
According to the International Monetary Fund’s April 2023 Fiscal Monitor report, US general government net debt was 94.2% of GDP in 2022, compared to an average of 81.6% across advanced economies and a global average of 74.6%. While the US net debt ratio was already elevated in 2019 (83.1%), it surged to 98.3% in 2020 as COVID-19, and the policy response to it, boosted the numerator and depressed the denominator. These recent figures are not only peacetime records; they also exceed the peaks at the end of World Wars I and II, when the higher ratios were rapidly eroded by (unanticipated) inflation and growth.
Fiscal policies should ensure that the net non-monetary debt of the consolidated state (including the central bank) does not exceed the present discounted value of current and future primary surpluses, including non-inflationary seigniorage. While the Federal Reserve will generate some revenues from the issuance of base money net of any interest paid on the outstanding stock of central-bank money, the seigniorage consistent with its inflation target is likely to be less than 0.5% of GDP. Not even acolytes of Modern Monetary Theory could make these numbers work.