Highest Debt-to-GDP Ratio since WW2 is Coming—CBO Says it’s OK
As the dust from the pandemic is finally settling, the reality of the economic impact is coming to light. With high inflation, global trade disruptions, and uncertain market outlook, among other factors, the United States is at a unique point in economic history. On top of the stimulus packages and GDP decrease during the pandemic, the federal government has needed to continue burrowing.
The prospect of a substantial federal deficit and drastically increased debt is quickly becoming the story of the 2021 fiscal year. While The Congressional Budget Office (CBO) claims that high economic growth will return, the combination coupled with high inflation is concerning.
The Future of US Debt to GDP
In a recent report, The Congressional Budget Office (CBO) projected that the US government will run a deficit of over $3 trillion, which is up 33% since the last report. By the end of 2021, the debt (excluding foreign debt) to GDP ratio will be over 103% for the first time since the end of World War II.
According to CBO data, the ratio was only 37% in 2007 and is projected to near 106% by the end of the decade. This 69% increase illustrates just how fast debt is rising, especially as GDP has risen over 55% from Q1 2007 to Q1 2021.
Below is a figure outlining the CBO’s projections through 2031, which includes deficit, GDP, and debt held by the public. Notice GDP surpassing debt in 2022, but then being overtaken again in 2026. Even though current interest rates are dismal, the projected interest payment by the end of the decade is projected to be a nearly intolerable $1 trillion.
The CBO expects the economy to grow 7.4% this year, as we progress out of the pandemic, then at a rate of 2.8% until 2025. They believe that this growth justifies the amounting debt as the GDP should outpace debt creation in the next decade. Additionally, unemployment is projected to continue to slide to nearly 4% and remain there for at least a few years.
However, the predictions don’t end there — the CBO also estimated that debt-to-GDP will rise to 202% in 2051. Although this is just a hypothetical future scenario, if it comes to pass, it will be a cause for concern.
High Inflation Continues to Run Rampant
Inflation continues to soar, reaching 5% in May. The Fed previously claimed that the high inflation is merely transitory, but now other concerns are being raised.
With Fed officials now voicing concerns that high inflation may last throughout 2022, the Fed has varying opinions. As the resumption of the economy continues, the Fed is eager to tighten policy, but must not do so too early or it may stagnate the recovery.
Consumers are feeling rising costs all around the country. With supply chain back-ups and quickly growing demand, prices have seen a major increase recently.
Lumber, used cars, and oil are some of the main consumer goods seeing a huge rise. This is especially having an impact on lower-income citizens, as their salaries have generally not yet seen boosts from inflation.
Overall, the US is in an unknown economic position. With growing debt and soaring inflation, the Fed has to be creative and watchful. What do you think is the most concerning aspect of the pandemic recovery? Let us know in the comments.