The debt apocalypse has been called off
It’s hard to escape the feeling that debt panic served a political purpose
US President Barack Obama appointed a special, bipartisan commission to propose solutions to the alleged crisis, and spent much of his first term trying to negotiate a Grand Bargain on the budget with Republicans. Photograph: Bloomberg
For much of the past five years readers of political and economic news were left in little doubt that budget deficits and rising debt were the most important issues facing America. Serious people issued dire warnings that the United States risked turning into another Greece any day now. President Barack Obama appointed a special, bipartisan commission to propose solutions to the alleged crisis, and spent much of his first term trying to negotiate a Grand Bargain on the budget with Republicans.
That bargain never happened because Republicans refused to consider any deal that raised taxes.
Nonetheless, debt and deficits have faded from the news. And there’s a good reason for that disappearing act: the whole thing turns out to have been a false alarm.
I’m not sure whether most readers realise just how thoroughly the great fiscal panic has fizzled - and the deficit scolds are, of course, still scolding. They’re even trying to spin the latest long-term projections from the Congressional Budget Office – which are distinctly non-alarming – as somehow a confirmation of their earlier scare tactics. So this seems like a good time to offer an update on the debt disaster that wasn’t.
About those projections: the budget office predicts that this year’s federal deficit will be just 2.8 per cent of GDP, down from 9.8 per cent in 2009.
It’s true that the fact that we’re still running a deficit means federal debt in dollar terms continues to grow, but the economy is growing too so the budget office expects the crucial ratio of debt-to-GDP to remain more or less flat for the next decade.
Things are expected to deteriorate after that, mainly because of the impact of an aging population on Medicare and social security. But there has been a dramatic slowdown in the growth of healthcare costs which used to play a big role in frightening budget scenarios. As a result, despite aging, debt in 2039 is projected to be no higher, as a percentage of GDP, than the debt America had at the end of the second World War or that Britain had for much of the 20th century.
Debt spiralOh, and the budget office now expects interest rates to remain fairly low, not much higher than the economy’s rate of growth. This in turn weakens, indeed almost eliminates, the risk of a debt spiral in which the cost of servicing debt drives debt even higher.
Still, rising debt isn’t good. So what would it take to avoid any rise in the debt ratio?