US Government Debt Different - Finance Department - University of ...

Deborah Lucas 1019The Federal Debt:Assessing the Capacity to PayDeborah LucasIn this chapter, I focus on fiscal imbalances — their structural sourcesand magnitudes; the types of policy changes that will be needed toaddress them; and some of the risks to the fiscal outlook that makean eventual default on Treasury debt a conceivable, although unlikely,outcome. I emphasize the fiscal outlook because the odds thatthe U.S. will find itself in a position where it is unable or unwillingto meet its debt obligations depend critically on the paths of futuretaxes and spending.While the future paths of taxes and spending will be affected by manyuncertain economic and political developments, there is little doubtthat current fiscal policy is on an unsustainable trajectory. Fortunatelythere are well understood and economically feasible policy options,which if implemented, would in all likelihood avert a futuredebt crisis. At the same time, there are significant downside risks thatcould significantly erode the economic capacity and political will topay. Those include the realization of higher-than-anticipated healthcare cost growth, sharp increases in borrowing costs, a significantslowdown in productivity growth, losses on contingent financial li-