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

134 Can the United States Achieve Fiscal Sustainability? Will We?ever, the country should be able to sustain levels of economic activitynecessary to finance its current debt levels, even given projectedincreases in government spending. The IMF forecasts that Italy willaverage real GDP growth of only 0.3 percent from 2012 through2017, while Spain will average growth of only 0.8 percent, so thosecountries will need large primary surpluses simply to stabilize theirnational debt levels. The United States, by contrast, is expected tosee real GDP growth of 2.9 percent per year. 22 Since the federal governmentcurrently pays a nominal effective interest rate of only 2.1percent, 23 this means that it could run modest annual deficits whilestill bringing down the national debt as a percentage of GDP.The same is true over the longer term, at least according to commonlycited forecasts. Discussions of the United States’ fiscal sustainabilityoften begin with the CBO’s long-term alternative fiscal scenario.In contrast to the CBO’s extended-baseline scenario, which is closelybased on current law, the alternative fiscal scenario incorporates severalassumptions intended to make it more realistic. 24 According tothe most recent alternative fiscal scenario, published in June 2011,the national debt will rise to 187 percent of GDP by 2035; updatedto incorporate subsequent legislative changes and economic re-estimates,this figure is now 142 percent of GDP, as shown in Figure1—still high by any standards. 25 (The most important reason for thedecline in projected debt levels is the limits on discretionary spendingimposed by the Budget Control Act of 2011.)22 IMF World Economic Outlook Database, April 2012.23 Projected net interest payments for 2012, divided by the average year-end debtlevels for 2011 and 2012. CBO, The Budget and Economic Outlook: Fiscal Years 2012to 2022, January 2012, Table 1-3, p. 10.24 For example, the alternative fiscal scenario assumes that various tax cuts willbe extended rather than allowed to expire; Medicare payment rates will remain atcurrent levels rather than falling as under current law; and the drawdown of troopsfrom Afghanistan will progress as currently scheduled. Somewhat more controversially,it also assumes that tax revenues will remain constant as a share of GDP inthe long term. CBO, CBO’s 2011 Long-Term Budget Outlook, June 2011, pp. 3–7.25 The CBO’s long-term forecasts are extensions of its ten-year forecasts. I haveupdated the June 2011 long-term alternative fiscal scenario by incorporating theten-year forecast from the CBO’s January 2011 Budget and Economic Outlook, usingsimilar assumptions to those in the June 2011 Long-Term Budget Outlook.