The government’s debt held by the public has not exceeded the size of the economy since World War II, the CBO said. It is set to hit 107 percent of Gross Domestic Product in 2023, the highest in the nation’s history.
The federal deficit has soared because of the government’s response to the pandemic. The size of the economy, meanwhile, has contracted. That has pushed up the ratio of debt to economic output.
The mounting debt level and higher deficits have had no noticeable effect on interest rates. The cost of long term borrowing has, in fact, plummeted. The yield on the 10-year Treasury note began the year at 1.877 percent and currently sits at 0.649 percent. That’s largely because long-term yields reflect expectations for the path of short-term interest rates and investors believe this will stay low for quite some time.
Inflation is also very low and has been falling this year. There is no evidence that the increase in debt or the deficit has crowded out private investment. To the contrary, it is likely private investment in the economy would have fallen more rapidly if the government had not ramped up spending to reverse the severe economic contraction caused by the pandemic, social distancing, and lockdowns.
Japan’s debt has long exceeded its GDP with no signs that this has pushed up interest rates or inflation or “crowded out” private investment.
CBO’s estimate of the deficit for 2020 is now $2.2 trillion more than the agency estimated in March 2020–mostly because of recently enacted legislation to combat the effects of the pandemic.
The cumulative deficit between 2021 and 2030 is projected to total $13.0 trillion–around 5.0 percent of GDP over that period–about the same as CBO projected in March. Lower projected wages, salaries, and corporate profits increase deficits, but that change is more than offset by lower projected interest rates and inflation, which decrease deficits.
In 2019, the average interest rate on debt held by the public was 2.5 percent. The CBO estimates that will to 1.2 percent by the middle of the decade, as bonds paying lower interest rates replace older bonds with higher rates. The CBO expects interest rates to climb in the latter half of the decade, pushing the average up to 2.1 percent by 2030.
It’s not clear that it is useful to compare the total debt, which is a stock of liabilities owed to the public and issued over the course of decades, to economic output, a measure of economic flows in a single year.