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

106 The Federal Debt: Assessing the Capacity to Payare significant risks to that outlook that, if realized, could reversethat conclusion, and those possibilities deserve more consideration,at least by way of a warning, than they often receive. Those risksinclude higher-than-expected health care cost growth; a slow-downin productivity growth; large increases in Treasury’s borrowing costs;losses on contingent financial liabilities like deposit insurance andpension guarantees; and pressures from fiscal imbalances at the stateand local level.Health care cost growth. The deficit and debt projections in Figures2 and 3 are based on projections of federal health care cost growththat are considerably more optimistic than historical experience. Figure3 compares the projections of Medicare spending used in variousgovernment projections with Medicare spending if historical ratesof excess health care cost growth were to continue. The differenceis significant: Medicare spending would rise to over 10.5 percent ofGDP by 2050 if historical trends continue, to about two percentagepoints higher than under the CBO Alternative Baseline.Productivity growth. The capacity to repay the debt is related to thesize of the economic pie, which over long horizons depends criticallyon the growth rate of productivity — the value of output that isproduced per unit of labor and capital inputs. The determinants ofproductivity growth are not well understood, and, historically, productivitygrowth has varied widely. Some are concerned that productivitygrowth will be slowed by the aging of the population, orthat higher taxes and spending cuts will lower productivity growth.However, there is little empirical evidence to support those views.Some observers believe that higher productivity growth is the bestway to resolve fiscal problems, but it is not a dependable approachbecause we know so little about how to encourage it, and becausethe necessary growth is so unlikely to be attainable. In fact, even ifgrowth proves to be somewhat above its expected path, the salutaryeffect on spending will be dampened by the positive correlation betweenproductivity and program costs.Interest rates. As the debt grows, so does the importance of the levelof interest rates on its affordability. The U.S. currently benefits great-