U.S. Can Halve its Debt-to-GDP Ratio by 2030 - If Budget Policy and Productivity Growth Are Balanced

NEW YORK, Aug. 8, 2013 /PRNewswire/ -- The Conference Board today announced the launch of the Global Debt and Growth Series, a project to analyze and compare sovereign debt's impact on the outlook for 15 advanced and developing economies (see list below). Over the coming months, a short research report for each country will examine present levels of government debt in historical context; the relationship between debt, output, and productivity growth over the next 20 years; and potential policy choices and other contingencies that may alleviate (or exacerbate) current dangers.  

The Way Forward for the U.S. Required Balanced Policy Approach
Debt and Growth Series: United States, the first report in the series, was released today. It explores the bipartisan policies and historical factors that led to large surpluses in the late 1990s, and provides an outlook for a similar debt-reduction course over the next 20 years. In the short-term, discretionary spending cuts and a release of pent-up demand after the Great Recession will certainly slash deficits. By the 2020s, however, the effects of an aging population will renew debt pressures.

Productivity growth will be key to alleviating the burden. The report lays out two potential paths through 2019–2030. If annual productivity growth is 2.3 percent, around the post-World War II average, debt-to-GDP ratio will fall from today's 105 percent to 90 percent by 2020 and a sustainable 50 percent by 2030. If, on the other hand, productivity grows at just 1.7 percent, debt-to-GDP may still be above 100 percent in 2023 and above 80 percent in 2030.  

"The big question mark for the U.S. is Washington," said Bart van Ark, Chief Economist at The Conference Board. "As baby boomers stream into retirement over the next decade, Medicare and Social Security must be addressed. Yet draconian cuts which depress productivity growth would prove as disastrous as massive unfunded entitlements. Managing debt requires a long-view consensus that balances the need for solid budget management and faster productivity growth. Creating more jobs is important, but making jobs more productive is even more important."

Debt, Growth, and Productivity: Long-Term Problems, Long-Term Solutions
Of course, the United States is not the only country walking a tightrope between the need to pay down massive debts and the danger of jeopardizing recovery. Debt and Growth Series: Introduction, also release today, examines these precarious balancing acts from a global perspective.

The report introduces a simple and powerful model for fiscal policy to be applied to the 15 national economies. Among its central principles:

• Focus on the growth rates. Thanks to the power of compounding, even very high debt levels can be brought down relatively quickly and painlessly if GDP—and with it, government revenue—grows reliably faster than government spending each year. The key is policy discipline to maintain the revenue–spending differential over at least 10 – 15 years.
  
  
• Avoid across-the-board cuts. Government cannot, with a single "sequester" or austerity budget, solve serious imbalances in entitlements and labor markets that have accumulated over decades. These politically fraught decisions must be negotiated over time. In the medium-term, spending growth should aim to match population growth and inflation; this constrains further debt but maintains the level of per-capita spending.
  
  
• Productivity growth is crucial. Holding per-capita spending constant, GDP and government revenue will grow faster than expenditure in the long run—thus reducing debt—only if workers become more productive. Stimulus policies should focus on productivity at least as much as on jobs; the latter can backfire if they lead to a less innovative, slower growth path.      

As the authors note, recent history illustrates how careful attention to the revenue–spending differential can dramatically improve indebtedness—and how quickly the gains reverse when discipline slacks. In the United States between 1996 and 2001, nominal GDP grew 5.6 percent, government revenues grew 6.7 percent, and spending grew 3.5 percent. Over those five years, gross debt fell from 67 percent to 56 percent of GDP. By 2007, debt-to-GDP was already at 65 percent. The subsequent crisis has sent it over 105 percent.

"Since the financial collapse of 2008 and the sovereign debt crises that followed, the 'debt–growth dilemma' has become increasingly polemicized," said van Ark. "Not just economists, but politicians and citizens have struggled to answer: How high can debt-to-GDP ratio rise before crippling a nation? At what point does austerity become self-defeating?

"The Global Debt and Growth Series steps back from such immediate controversies to root today's debt disasters—and relative success stories—in the interaction of government spending with output and productivity over the long term. Instead of universal doctrines, these reports will bring a common conceptual framework to bear on the economic, political, and demographic factors specific to each country. Rather than silver bullets, they chart a path forward for policymakers and help the business community better understand the implications of the choices being made."

Global Debt and Growth Series Videos:

Chief Economist Bart van Ark: http://www.youtube.com/watch?v=6HSH3fqpuZ8
Director for Macroeconomic Analysis Kathy Bostjancic: http://www.youtube.com/watch?v=PXaDYpcFprI

Future Reports in the Global Debt and Growth Series:
Advanced Economies: Japan, Germany, Spain, France, United Kingdom, Italy, Netherlands
Developing Economies: Brazil, China, India, Mexico, Turkey, Russia, Indonesia

For complete details:
http://www.conference-board.org/publications/publicationlistall.cfm

About the Conference Board
The Conference Board is a global, independent business membership and research association working in the public interest. Our mission is unique: To provide the world's leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States. www.conference-board.org

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