The fast-growing national debt is on pace to reduce the growth in American households’ incomes in the decades ahead if the debt isn’t stabilized, according to a new report.
An analysis by the nonpartisan Congressional Budget Office (CBO) found the rising national debt will slow economic growth and suppress the growth of Americans’ household income over time. It looked at scenarios with the size of the national debt held by the public stable at 99% of gross domestic product and the CBO’s baseline under current law and a scenario in which debt would rise more rapidly.
The CBO estimated that gross national product (GNP) per person, a measure of average income, is about $84,400 this year. If the debt is stable relative to the size of the economy at 99%, CBO projected average income will grow by over $44,000 when adjusted for inflation to $128,600 in fiscal year 2054.
By contrast, the CBO’s current law baseline has debt held by the public rising to 166% of GDP by fiscal year 2054, which would slow income growth by about 12% to about $123,200 per person. In the additional debt scenario that reflects higher spending levels and less tax revenue due to tax cuts, debt will rise to 294% of GDP by fiscal 2054. And the nonpartisan Committee for a Responsible Federal Budget (CRFB) estimated that would cause income growth to slow by about one-third to $114,100 at that time.
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“Essentially, the CBO thinks that if we stop increasing the debt — if we do spending cuts and tax increases or whatever it takes to stop the debt from growing — then income per person is going to grow 1.5% per year [above inflation],” CRFB SVP and Senior Policy Director Marc Goldwein told FOX Business.
“On the other hand, if we don’t make those spending choices or tax choices, but we don’t make things any worse, then it’s going to grow about 1.25% per year. And then there’s that last scenario where, if we make things worse, it’s only going to grow like 0.8% or 0.9% per year.”
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The reason for slower household income growth due to a larger national debt is due to an economic phenomenon known as the crowding out effect. In essence, this is due to reduced investment in the private sector brought on by higher levels of government debt requiring the sale of more bonds, which compete with private sector alternatives.
“The government sells bonds to borrow money, and when it sells bonds, investors buy those bonds instead of investing in the private sector,” Goldwein explained. “So, I have a dollar that I was going to use to buy a corporate bond or to buy a stock or to put in the bank that can then lend it out to businesses or for mortgages. Instead, I buy federal bonds.
“What this means is that there’s less investment in the private economy, and over time that means there’s less buildings, machines and equipment and software innovations. And that leads to slower wage and income growth. It doesn’t happen all at once. It happens gradually, little by little.”
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Goldwein also noted that higher levels of government debt tend to cause interest rates to rise, which further squeezes household budgets experiencing slower income growth.
“Not only does this high debt push down the growth rate and push down income growth, it also pushes up interest rates. So, that means at the same time your incomes are growing more slowly, your mortgage is going to cost more, your car loan is going to cost more and the federal government is going to spend more and more on interest, which means they’ve got to spend less on everything else,” he explained.
Goldwein said policymakers should look to stabilize the country’s long-term fiscal outlook and not focus so heavily on short-term political considerations.
“The problem is they’re worried about the next election, not the next generation. And that doesn’t speak for responsible fiscal policy. And that’s part of the reason we’re in the mess we’re in right now,” Goldwein added.
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