Fiscal Future Is Not Bright: A Simulation Study of U.S. National Debt

The CBO issued its latest ten-year budget and economic outlook earlier this year. It projects the public portion of the U.S. national debt will reach 116% of GDP by 2034.

That projection is based on what many fiscal policy observers describe as overly optimistic assumptions. Bloomberg’s economists wanted to find out how really sustainable the U.S. government’s current fiscal policies are over this short term. To find out, they ran one million simulations of how the national debt could change over the next 10 years.

Those simulations start with the CBO’s baseline projections. These assumptions include things like recession-free real GDP growth of 2% a year and inflation that runs at just 2% a year. They then deviated from the CBO’s projections for the interest rate the U.S. government pays on the money it has borrowed. Instead of the CBO’s projected interest rate, they substituted market interest rates based on how the U.S. national debt is structured.

For example, instead of applying the CBO’s forecast interest rate to 90-day T-bills, they set the interest rate for the amount borrowed in these bills according to their market interest rate. They repeated this process for all the other durations, such as Treasury bills and bonds the government issued to its creditors as it borrowed money from them.

Then, they ran their simulation. Here’s their basic result for the next ten years:

Bloomberg Economics has built a forecast model using market pricing for future interest rates and data on the maturity profile of bonds. Keeping all the CBO’s other assumptions in place, that shows debt equaling 123% of GDP for 2034. Debt at that level would mean servicing costs reach close to 5.4% of GDP—more than 1.5 times as much as what the federal government spent on national defense in 2023, and comparable to the entire Social Security budget.

One million simulations, one million outcomes

The next part of their study tweaked the basic parameters to see how these changes affect the outcome.

They varied economic growth, inflation, and interest rates in their simulation based on historical data, with each set of varied factors representing one simulation. They generated one million of these simulations. Here’s how they describe the one million outcomes they got from all that analysis:

With uncertainty about so many of the variables, Bloomberg Economics has run a million simulations to assess the fragility of the debt outlook. In 88% of the simulations, the results show the debt-to-GDP ratio is on an unsustainable path—defined as an increase over the next decade. . . .

In the worst 5% of outcomes, the debt-to-GDP ratio ends 2034 above 139%, which means that the US would have a higher debt ratio in 2034 than crisis-prone Italy did last year.

It’s getting harder for Washington, D.C.’s politicians and bureaucrats to claim their current fiscal policies are sustainable with any credibility.

Craig Eyermann is a Research Fellow at the Independent Institute.
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