America and its debts: Will the November election mend the GDP crisis?
3 Min Read
Even in the absence of further borrowing, the interest rate on public debt will rise until the economy grows more quickly or interest rates sharply decline as the next four years will be detrimental.
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Hulk Hogan waving the US flag while on stage during the Republican National Convention on Thursday, July 18, 2024, in Milwaukee (AP)
Regardless of the outcome of November's US presidential elections, the country's already dire financial situation is expected to worsen over the next four years as net government debt has increased from 40% of GDP in 1990 to 98% of GDP.
America has the eighth-highest net public debt-to-GDP ratio in the world, according to data released by the IMF in April. A few other developed economies rank higher than the United States. Japan comes in second place with a share of 158%. Italy comes in third with 129%.
The rate at which America's debt is accruing and its importance to the world economy make its numbers even more concerning. According to IMF predictions, the country's deficit in 2024 will be 6.5% of GDP.
Similar to most developed nations, America's debt problems started during the 2007–2008 financial crisis and reappeared in the wake of the 2020 pandemic. Apart from these crises, however, the debt-to-GDP ratio stabilized in line with the other wealthy nations in the G7. But this time, the IMF predicts that the US debt will keep growing.
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Whether the nominal growth rate of the economy; i.e. the government's tax base, is higher than the interest rate; i.e. the servicing of its debts, is one element that influences the sustainability of debt.
Meanwhile, the economy’s rate of growth was higher than the interest rate between 2008 and 2019 when rates dropped to almost zero.
The percentage of government revenues that went toward debt payment decreased to around half of what it was in 1990. To put it simply, debt as a percentage of GDP did not increase even as government borrowing did.
Due to the high inflation in 2021–2023, incomes and prices increased swiftly, increasing the nominal economic output of the United States. In the meantime, the debt decreased in relation to GDP since the amount it owed increased more slowly in dollars. But with inflation now back under control, politicians can no longer rely on price increases to decrease the ratio.
In 2024, the government will use $728 billion, or 16% of revenue, to service its debt. However, with an average maturity of six years, some of its pre-pandemic low-interest debts will still incur low interest rates. The cost of servicing government debt will surge as more of it is renewed at higher rates. Even in the absence of further borrowing, the interest rate on public debt will rise unless the economy’s rate of growth improves or interest rates fall drastically.
This comes as Federal Reserve chief Jerome Powell stated in February that the US national debt was on an "unsustainable" path, currently standing at more than $34 trillion, according to US Treasury data.
Back in June last year, US President Joe Biden signed into law a bipartisan debt ceiling bill, narrowly averting a $31 trillion debt default that would have shaken the world's biggest economy.
The law, titled Fiscal Responsibility Act of 2023, grants the government authorization to extend the debt ceiling to renew borrowing and allow the government to meet its obligations.
