February 28 (Reuters)—Orlando, Florida Much of the debate about U.S. public finances assumes that structurally higher interest rates would drive debt payment costs to unbearable levels, risking a fiscal catastrophe that can only be avoided by harsh austerity.
Borrowing costs and spending are justified concerns, but this ignores the government's other side. Imagine interest rates and bond yields staying 'higher for longer' due to a'stronger for longer' economy.
More robust growth enhances tax income, but expenditure trajectory noise often overshadows this. In its February estimates, the non-partisan Congressional Budget Office provided gloomy numbers. However, it anticipated that net immigration will grow the workforce by 5.2 million people over 2023–2034, boosting economic production by $7 trillion and tax revenues by $1 trillion.
“Higher immigration might assist raise GDP growth on a sustained basis, and this would help stabilize the debt-to-GDP ratio," said Barclays top U.S. economist Marc Giannoni.
Tax revenues can be significantly affected by annual economic or productivity growth exceeding consensus predictions by one or two tenths of a percentage point in a $28 trillion economy. Compared to the CBO's baseline predictions, a 0.2 percentage point productivity boost every year in 2024-2033 would increase revenues by $673 billion and lower the deficit by $400 billion.
By the end of the decade, the economy would be $40.5 trillion and the debt-to-GDP ratio would be 114.8%, down 3.4 percentage points from baseline projections.Debt sustainability depends on the link between debt service interest costs and economic growth rates, or 'r minus g.'
The CBO expects nominal GDP growth and the 10-year Treasury yield to average 4% for much of the next decade.
The average interest rate on the $34 trillion U.S. federal debt has risen above 3%. However, that is historically low and significantly below recent and present nominal GDP growth rates of around 5%. U.S. bond yields are lower than in October despite a rising term premium, massive debt issuance, and anticipation that the Fed may raise 'R-star,' its estimate of the long-term neutral rate of interest.
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