Economic Recovery is Behind Stable Near-Term Debt

While the Congressional Budget Office's latest budget outlook shows debt being larger than the size of the economy for the foreseeable future and reaching a record of 107 percent of Gross Domestic Product (GDP) by 2031, some commentators are using the relatively stable near-term debt trajectory to make the argument that the United States has more available fiscal space than previously believed. This near-term stability, however, is driven by two temporary effects: the economic slowdown and the Treasury Department's build-up of its cash reserves. These two effects made some of the debt's growth that would have happened over the next few years appear in 2020. If they are removed, debt grew less in 2020 but continues on an upward trajectory instead of being stable.

CBO's outlook shows debt increasing slightly between 2020 and 2023 from 100 to 102 percent of GDP under current law, dipping slightly to 101 percent by 2026, then rising to 107 percent of GDP by 2031. The near-term rise is partially driven by a drop in GDP in 2020. As the economy recovers, GDP increases, which decreases deficits and helps keep the debt ratio appearing stable. The Treasury Department also had accumulated nearly $1.8 trillion of cash-on-hand by the end of Fiscal Year (FY) 2020, which is money borrowed in 2020 but available to cover future spending.

An alternate measure of debt – debt net of financial assets as a share of potential GDP – would remove these two factors. This alternative measure shows debt increasing by 9 percentage points between 2020 and 2023 – from 83 percent of potential GDP to 92 percent – continuing to rise slightly to 93 percent by 2027, then rising more rapidly to 99 percent in 2031.

The standard debt-to-GDP ratio also shows plenty of fiscal trouble on the horizon. Debt is expected to rise continuously as a share of GDP after 2026 to a record 107 percent of GDP in 2031 and nearly double over the following two decades to 202 percent in 2051. Regardless of the measure used, it is clear that lawmakers will have to act to prevent a huge rise in debt over the long term.