LONDON – One of the more amusing exercises on the economic calendar is the International Monetary Fund’s annual review of the United States. Yet while everyone knows that the US government pays absolutely no heed to what the IMF has to say about its affairs, the Fund’s most recent Article IV review of the US economy is striking for one unexpected finding. Readers will be startled to learn that, in the IMF’s estimation, US government debt is on a sustainable path.
This conclusion reflects consensus assumptions about the evolution of inflation, GDP growth, interest rates, and budget deficits. It is of course hazardous to attempt to forecast these variables for a period of ten years, much less for 30 years, the horizon over which the US Congressional Budget Office undertakes an analogous exercise. The assumptions adopted by the two institutions differ in their particulars, the CBO being slightly more optimistic about America’s growth prospects, for example. But while both institutions foresee debt rising over the next ten years, neither sees it spiraling out of control.
To understand why, it is important to begin from the appropriate starting point. This is not total federal government debt, but rather debt in the hands of the public. A non-negligible share of total US federal debt is held by the government itself, notably in the Social Security Trust Fund. The Treasury’s interest payments on this portion represent interest income for the Trust Fund. On this share of its debt, the government is simply making interest payments to itself.
Debt in the hands of the public is currently 100% of GDP – an elevated level by advanced-economy standards, but by no means catastrophic. CBO sees this rising, assuming no changes in prevailing law, to 116% of GDP in 2034, 139% in 2044, and 166% in 2054.
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