CFR: U.S. Falling Behind Other Advanced Countries on Debt

The Council on Foreign Relations has released a new report and scorecard comparing the United States federal debt situation to other G-7 countries (Canada, France, Germany, Italy, Japan, and the United Kingdom). The verdict is not good. While the U.S. had a much lower debt-to-GDP ratio in 2000 than the G-7 average, it has since caught up and is expected to have higher debt than every country in the group besides Japan by 2040. The report's author Rebecca Strauss shows the deterioration in the U.S. fiscal position since 2000 plus the daunting trajectory of debt going forward.

Although the G-7 as a whole has seen its debt rise as a percent of GDP since 2000, the U.S. government's rise has been much faster, with debt more than doubling over that time period. Average G-7 debt was 54 percent of GDP in 2000 compared to 34 percent for the United States. Since then, U.S. debt has grown to nearly the levels of the G-7, with average G-7 debt at 86 percent and the U.S. at 82 percent (note the report uses different numbers than CBO in order to make an apples-to-apples comparison with other countries). In addition, the share of debt owned by foreign countries has risen from one-third to about half in that period of time. Much of the growth in U.S. debt has come since 2009, when deficits averaged 7.6 percent of GDP largely due to the financial crisis, slow recovery, and economic stimulus measures.

Source: International Monetary fund

As deficits have declined, CBO projects the debt situation will stabilize for the next few years, albeit at a historically high level. However, rising entitlement spending combined with a lack of a similar rise in revenue will put debt on an upward path again to a record-high level of 110 percent by 2040. At that point, the U.S. would have more debt than each of the other G-7 countries other than Japan, and it would have the third-highest debt in the 34-country Organisation for Economic Co-operation and Development (OECD), with only Japan and Greece ranking higher.

Policymakers have enacted significant savings in recent years, but the savings have mostly been focused on discretionary spending cuts over the short tem, which is not the core driver of long-term debt. This focus has resulted in stable medium-term but rising long-term debt projections. Furthermore, cuts to discretionary spending reduce items in the budget like education, research, and infrastructure that would boost economic growth.

While the federal government simultaneously has been cutting the wrong area of the budget and ignoring the long-term debt problem, other countries have done a better job of tackling the critical drivers of their debt problems. Strauss points out how other countries have done much better in controlling health care costs than the U.S.: excess health care cost growth is a much bigger factor in the growth of health spending here than it is in the other G-7 countries.

The report does note that the U.S. is better positioned to weather the demographic storm of the next few decades. In 2040, it will have a younger population, richer retirees, and would require a smaller tax increase to fund retirement benefits than the G-7 average. Still, the fact that other countries have faced these challenges sooner means that they have put in place policies to make their retirement and health care programs more sustainable. U.S. policymakers, meanwhile, have not.

Strauss caveats these comparisons by explaining how the U.S. likely has the capacity to shoulder higher debt burdens than other countries. The sheer size of its economy and the dollar's status as the world's main reserve currency both should allow the U.S. to sustain a relatively higher debt burden. However, this does not mean that the federal government's borrowing capacity is unlimited or that high debt won't slow the growth of the U.S. economy. These fiscal advantages buy the U.S. some time to get its fiscal house in order, but they should not be an excuse for complacency.

Strauss summed up the situation well in an accompanying op-ed:

The tragedy of the recent era of budgetary wrangling, with debt ceiling brinkmanship and high-flying rhetoric about the federal debt, is that congress and the president managed to accomplish so little but did so much harm. Debt-reduction measures closed deficits in the near term, putting the brakes on the economy, without making a serious dent in the long-term debt problem. And austerity through the across-the-board sequestration cuts was aimed almost exclusively at discretionary spending, which was set to decline anyway and hurt the small parts of the federal budget that promote economic growth like education, infrastructure, and research. Changes to entitlements and taxes—the only way the budget can be balanced in the long term—were all but left out.

Click here to read the full report.