WASHINGTON (Reuters) – The U.S. federal debt burden will double over the next 30 years, reaching 202% of economic output in 2051, as deficits grow and interest rates eventually rise, the Congressional Budget Office said on Thursday in its latest long-term budget projections.
The non-partisan CBO projected that federal debt will reach 102% of gross domestic product in 2021 due to massive spending associated with the coronavirus pandemic. This spending is expected to fade over the next decade, shrinking annual deficits to an average of 4.4% of GDP in the 2022-2031 period, from 10.3% in 2021.
But deficits are forecast to then grow to average 7.9% of GDP in the 2032-2041 period and 11.5% of GDP in the 2042-2051 period, the CBO said in its projections, which it noted are based on currently enacted laws.
The projections do not include any effects of President Joe Biden’s proposed $1.9 trillion coronavirus stimulus bill, nor his planned investments in infrastructure, education and research.
A major factor in the buildup of U.S. debt in future decades in the CBO analysis is an assumption that interest rates will rise from historically low levels as the economy recovers from the pandemic. The CBO projects 10-year Treasury note yields to average 1.6% from 2021 to 2025, rising to 3.0% from 2026 to 2031 and reaching 4.9% by 2051.
The 10-year Treasury yield has risen in recent weeks on optimism about the U.S. economic recovery and concerns about a possible future spike in inflation, reaching 1.55% on Thursday after hovering well below 1% for much of the past year.
Low interest rates have cut the U.S. net interest cost significantly even as debt has risen. In selling Biden’s stimulus plan, Treasury Secretary Janet Yellen has emphasized that lower interest costs provide fiscal space to increase spending, especially on programs and projects that boost economic growth.
The CBO’s analysis shows higher interest rates increasing both annual deficits and the debt-to-GDP ratio.
“Because debt is already high, even moderate increases in interest rates would lead to significantly higher interest costs,” it said.
Source: Economy - investing.com
