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A new report says that if the rapidly growing national debt isn’t stabilized, it will be on track to cause declines in American household income growth over the coming decades.
An analysis by the nonpartisan Congressional Budget Office (CBO) found that a rise in the national debt would slow economic growth and limit the growth of American household incomes in the long run. The analysis looked at a scenario in which the size of the national debt held by the nation was stable at 99 percent of gross domestic product, the CBO’s baseline under current law, as well as a scenario in which the debt grew more rapidly.
CBO estimates that gross national product (GNP) per capita, a measure of average income, will be about $84,400 this year. If debt remains stable at 99 percent relative to the size of the economy, CBO projects average income would increase by more than $44,000, adjusted for inflation, to $128,600 in fiscal year 2054.
In contrast, under CBO’s current law baseline, national debt would rise to 166 percent of GDP by fiscal year 2054, and income growth would slow by about 12 percent to about $123,200 per person. Under an additional debt scenario that reflects higher spending levels and lower tax revenues from tax cuts, debt would rise to 294 percent of GDP by fiscal year 2054. And the nonpartisan Committee for a Responsible Federal Budget (CRFB) estimates that income growth would slow by about one-third to $114,100 at that point.
National Debt Tracker: American taxpayers (you) owe $34,606,167,915,025.93 as of May 29, 2024
The rising national debt could slow American income growth by one-third over the next 30 years. (CFOTO/Future Publishing via Getty Images / Getty Images)
“Basically, the CBO believes that if we stop the debt from growing — if we cut spending, raise taxes, do what’s necessary to stop the debt from growing — per capita income would increase by 1.5 percent per year. [above inflation]” Mark Goldwein, executive vice president and senior director of policy at CRFB, told FOX Business.
“On the other hand, if we make no spending or tax choices and things don’t get worse, we’ll grow about 1.25 percent per year. And in the last scenario, even if things get worse, we’ll only grow 0.8 or 0.9 percent per year.”
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The national debt has grown rapidly in recent years, with annual deficits exceeding $1 trillion. (Jemal Countess/Getty Images, Courtesy of the Peter G. Peterson Foundation/Getty Images)
The reason why rising national debt slows household income growth is due to an economic phenomenon called the crowding out effect: essentially, rising government debt leads to more bond sales that compete with private sector alternatives, reducing private sector investment.
“The government sells bonds to borrow money, and when they sell those bonds, investors buy those bonds instead of investing them in the private sector,” Goldwein explained. “So those dollars that would have been put in the bank to buy corporate bonds or stocks or to lend to businesses or mortgages, instead buy federal bonds.”
“That means less investment in the private economy. And over time, that means less innovation in buildings, machinery, equipment, software. And that leads to slower wage and income growth. And it doesn’t happen all at once, it happens gradually, bit by bit.”
Interest costs on the national debt have exceeded defense and health spending.
The total national debt now exceeds $34.5 trillion. (FOX Business/Fox News)
Goldwein also noted that rising government debt tends to lead to higher interest rates, further straining household budgets at a time when income growth is slowing.
“This high debt not only slows growth and income growth, it also raises interest rates, which means income growth slows at the same time that mortgage and auto loan costs rise and the federal government ends up spending more and more on interest, which means it has to cut all other spending,” he explained.
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Goldwein said policymakers should aim to stabilize the country’s long-term fiscal outlook and not place too much emphasis on short-term political considerations.
“The problem is they’re worried about the next election, not the next generation. That’s not indicative of responsible fiscal policy, and that’s part of the mess we’re in right now,” Goldwein added.
