What Will It Take to Shrink the Debt-to-GDP Ratio?

by Reihan Salam

Given the rancor of negotiations over long-term deficit reduction, budget hawks are restraining their ambitions. Ron Haskins of Brookings, for example, has ruefully offers a new goalpost:

So forget going big or even medium on deficit reduction. Now we need to go tiny. And what is tiny? Following William Galston of Brookings, I define tiny as holding the line on the accumulated debt of the federal government as a percent of GDP over the next ten years. The debt-to-GDP ratio is now 73 percent. If our goal is to treat this 73 percent as our deficit line in the sand, how much will we need to slow spending growth or increase revenue to arrive at New Year’s Eve in 2023 with a federal debt at or below 73 percent of GDP?

This is in keeping with the Obama administration, which has called for $1.5 trillion in additional deficit reduction to stabilize the debt-to-GDP ratio. But the Committee for a Responsible Federal Budget argues that a stable debt-to-GDP ratio is not the right goal as it allows no room for error. If growth proves slower than the CBO’s projections, we could aim for stability and wind up with a much higher debt-to-GDP ratio:

To demonstrate why a $1.4 trillion plan is unlikely to be sufficient, we put an illustrative plan into our long-term budget model. Specifically, we took CBPP’s $1.191 trillion of primary savings ($185 billion in 2022) and $177 billion of interest savings ($51 billion in 2022) and assumed the primary savings is split equally between revenue and spending (CBPP’s “Scenario B”). For illustrative purposes, we assume all of the health and other mandatory savings from the President’s budget, with additional spending reductions coming from discretionary spending.

As the graph below demonstrates, this deficit reduction would be sufficient to keep the debt stable only through 2023 after which it would begin to rise again — reaching 94 percent of GDP in 2035 based on CRFB’s Realistic Baseline. Although the savings grow over time, particularly the interest savings, they do not grow fast enough to combat the effects of health care cost growth and population aging. In other words, we should enact more savings in order to get out in front of these effects.

CRFB concludes by addressing the underlying question of why we should care about shrinking the debt-to-GDP ratio, emphasizing that a lower level of public debt would give the federal government more “running room” to increase spending in the event of an economic or national security crisis. Here’s hoping kinetic computing rides to the rescue.