The Fiscal &
Economic Impact

A strong fiscal outlook is an essential foundation for a growing, thriving economy. Putting our nation on a sustainable fiscal path creates a positive environment for growth, opportunity and prosperity. With a strong fiscal foundation, the nation will have increased access to capital, more resources for public and private investments in our future, improved consumer and business confidence, and a stronger safety net.

However, if we fail to act, the opposite is also true. If our long-term fiscal challenges remain unaddressed, our economic environment weakens as confidence suffers, access to capital is reduced, interest costs crowd out key investments in our future, the conditions for growth deteriorate, and we put our nation at greater risk of economic crisis. If our long-term fiscal imbalance is not addressed, our future economy will be diminished, with fewer economic opportunities for individuals and families, and less fiscal flexibility to respond to future crises.

The following summarizes several of the negative ramifications of our growing debt:

Reduced Public Investment. As the federal debt increases, the government will spend more of its budget on interest costs, increasingly crowding out public investments. Over the next 10 years, CBO estimates that interest costs will total $4.8 trillion under current law. Interest on the debt will be the third largest category in the federal budget in 2028, the second largest in 2046, and the single largest in 2050. Yet those interest costs are not investments in programs that build our future. Instead, they are largely about the past. And the more that resources are diverted to interest payments, the less that will be available for the federal government to invest in areas that are important to economic growth. Although interest rates are currently low, we can’t expect these conditions to last forever. As economic growth improves, interest rates are likely to rise, and the federal government's borrowing costs are projected to increase markedly. By 2046, CBO projects that interest costs alone could be more than two times what the federal government has historically spent on R&D, nondefense infrastructure, and education combined.

Interest on the federal debt will soon be the largest category of the budget

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Reduced Private Investment. Federal borrowing competes for funds in the nation’s capital markets, raising interest rates and crowding out new investment in business equipment and structures. Entrepreneurs face a higher cost of capital, potentially stifling innovation and slowing the advancement of new breakthroughs that could improve our lives. At some point, investors might begin to doubt the government’s ability to repay debt and could demand even higher interest rates, further raising the cost of borrowing for businesses and households. Over time, lower confidence and reduced investment would slow the growth of productivity and wages of American workers.

Fewer Economic Opportunities for Americans. Growing long-term debt also has a direct, real world effect on the economic opportunities available to every American. In terms of real (inflation-adjusted) income levels, CBO estimates that rising federal debt could reduce the real income for a 4-person family by as much as $12,000, on average, in 2046. This represents a 3.4 percent loss in income, compared to stabilizing the debt. In addition the debt negatively impacts economic opportunity and social mobility because it crowds out investments that help Americans get ahead. Higher interest rates make it harder for families to buy homes, finance car payments, or pay for college. Fewer education and training opportunities would leave workers without the skills to keep up with the demands of a more technological, global economy. Faltering R&D support would make it harder for American businesses to remain on the cutting edge of innovation, and would hurt wage growth in the U.S. Slower economic growth generally would also make our fiscal challenges even worse, as lower incomes reduce tax collections and put the federal budget further out of balance. Vital safety net programs would come under even greater budgetary pressure, threatening support for those who need them most.

The growing federal debt is projected to reduce average income per person by as much as $6,000

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Reduced Fiscal Flexibility. High levels of debt would also reduce our government’s flexibility to respond to future emergencies, unanticipated challenges, wars or recessions. Indeed, one reason why the United States was able to recover from the Great Recession was because our debt was fairly low — at 35 percent of GDP — before the financial crisis. As a result, U.S. policymakers had considerable flexibility in addressing the crisis. If debt had been at 100% of GDP at the start of the crisis, it would have been difficult to respond. Similarly, the United States had the resources to fight World War II at a high tempo because debt was low before the war.

COALITION FOR FISCAL AND NATIONAL SECURITY

A new statement urging policymakers to stabilize our national debt and renew and rebalance our national security strategies.

THE TAX REFORM OPPORTUNITY

Video: Our tax code is complex, unfair, and insufficient. Learn more about the opportunity we have to reform and improve tax policy.