Income Growth Would Slow By One-Third Due to Rising Debt

A new report from the Congressional Budget Office (CBO) finds rising national debt will slow economic growth and reduce projected incomes. Compared to a scenario with stable debt-to-GDP, CBO's estimates show:

• The current law debt trajectory will reduce income growth by 12 percent over the next three decades and 13 percent annually by Fiscal Year (FY) 2049.
• Rapidly rising debt could reduce income growth by 33 percent over the next three decades and 42 percent annually by FY 2049.
• Rapidly rising debt would reduce projected income by about $14,500 per person in FY 2054, in today’s dollars.

This year, CBO estimates average income, as measured by Gross National Product (GNP) per person, will total about $84,400. Assuming debt remains stable at 99 percent of Gross Domestic Product (GDP) over the next three decades, CBO projects average income will grow by more than $44,000 (when adjusted for inflation), to $128,600. However, rising national debt will stifle this growth.

Under CBO’s current law baseline, where debt is projected to rise to 166 percent of GDP by FY 2054, CBO projects income will grow by less than $39,000, to $123,200 per person. In other words, income growth would slow by about 12 percent. This is the result of crowding out, whereby a higher national debt reduces private investment and slows income growth.

With additional debt, income growth would slow further. For example, CBO constructs an alternative scenario where revenue and certain spending returns to historical averages and, as a result, debt rises to 294 percent of GDP by FY 2054. Under that scenario, we estimate per person income would grow by less than $30,000 over thirty years, to about $114,100.¹ In other words, income growth would slow by about one-third relative to if debt was stable.

By FY 2054, we estimate income per person will be about $14,500 lower under the rising debt scenario as compared to a scenario in which debt was stabilized. This represents an 11 percent reduction in per person income, which would grow larger over time.

Indeed, rising debt will slow income growth by an increasing pace over time.

Under the stable debt scenario, CBO projects real per person income will grow by 1.46 percent in FY 2049. That growth rate falls to 1.27 percent under their current law baseline and 0.85 percent under a rising debt scenario. In other words, income growth in 2049 would be 42 percent slower with rising debt than with stable debt.

CBO projects that rising debt will also slow the growth of output and boost interest rates. Over the long term, CBO projects real GDP will grow about 1.2 percent per year with rapidly rising debt, compared to 1.8 percent per year with stable debt – leading to an 8 percent reduction in output by FY 2054.

Meanwhile, the average interest rate on federal debt is projected to rise to 4.8 percent with rising debt, compared to 3.6 percent with stable debt. The gap for interest rates on new debt is likely to be significantly higher than that, flowing through to higher mortgage, car loan, and business loan interest rates.

To secure strong income and economic growth and keep interest rates low, policymakers should work to stabilize the debt and put it on a downward path, rather than enacting further deficit-financed tax cuts and spending increases.

1 In this scenario, CBO only projects GNP per person through FY 2049 due the very high levels of debt after that period. We extrapolate the final five years.