Jim Tyson
4 min read
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Under current law the increase in federal debt during the coming decade will push up borrowing costs, erode private investment by 13.6% and reduce the size of the economy by $340 billion, the Peter G. Peterson Foundation said Monday.
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U.S. debt by 2035 will balloon from 100% of gross domestic product to 117% in 2035 and 156% by 2055, the foundation said, citing analysis by EY and the Congressional Budget Office. The U.S. in the coming decade will also lose 1.2 million jobs and wages will shrink 0.6%, according to Peterson projections.
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The forecasts do not account for current efforts by President Donald Trump and Republican lawmakers to boost federal spending and avert the expiration of 2017 tax cuts. If signed into law, such changes “would significantly increase deficits and debt above these current law projections,” the foundation said.
Borrowing costs initially surged before receding on Monday, the first day of bond trading after Moody’s Ratings late Friday cited the gloomy fiscal outlook and downgraded U.S. debt to Aa1 from Aaa.
The yield on the 10-year Treasury — a benchmark for business and consumer lending – increased from 4.48% at the start of trading to as high as 4.56% before falling to 4.46%.
The rating downgrade “reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” Moody’s said in a statement.
“We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration,” Moody’s said.
If Trump and the Republican-controlled Congress extend the 2017 Tax Cut and Jobs Act, they will add roughly $4 trillion to the primary fiscal deficit — which excludes interest payments — by 2035, Moody’s said.
“Without adjustments to taxation and spending, we expect budget flexibility to remain limited, with mandatory spending, including interest expense, projected to rise to around 78% of total spending by 2035 from about 73%” last year, Moody’s said.
In coming years, federal revenue will probably fail to keep pace with the cost of servicing U.S. debt and federal spending, especially on outlays to entitlements such as Social Security and Medicare, according to the foundation.
“As these federal obligations grow without reform, policymakers will face more and more difficult decisions on how to address the structural imbalance between spending and revenue,” the foundation said.
