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

James Kwaka real growth rate of 2.2 percent. 29 Given historical experience, theseseem like reasonably conservative assumptions. From 1948 through2011, the average real effective interest rate paid by the TreasuryDepartment was 1.7 percent; the real interest rate has not exceeded2.5 percent since 2002. 30 From 1982 through 2011, however, theaverage rate was 3.6 percent, significantly above the CBO’s longtermforecast. This implies that we should attempt to estimate thesensitivity of future debt levels to interest rates. Figure 3 shows the2050 national debt level as a function of the long-term average realinterest rate, assuming real growth of 2.2 percent and a tax level of 25percent of GDP (the federal tax level that would raise overall taxes tothe OECD overage). 31 As can be seen from the figure, higher longtermreal interest rates do have a significant impact on future debtlevels, but even with interest rates at 4 or 4.5 percent, the 2050 debtremains around current levels.Figure 3: Impact of Long-Term Interest Rate on 2050 National Debt137Assumes: federal tax revenues of 25 percent beginning in 2023; real GDP growth of 2.2 percent beginningin 2023.Source: CBO, CBO’s 2011 Long-Term Budget Outlook, June 2011; CBO, The Budget and Economic Outlook:Fiscal Years 2012 to 2022, January 2012; analysis by the author.29 CBO, CBO’s 2011 Long-Term Budget Outlook, June 2011, pp. 24–25.30 Calculated as net interest payments in year N divided by the average of debt heldby the public at the end of years N-1 and N, deflated by the annual change in theGDP price index. OMB, note 2, above, Tables 3.1, 7.1; BEA, National Income andProduct Accounts, Table 1.1.4.31 Through 2022, I use the effective interest rate produced by the CBO’s alternativeten-year forecast. After that point, I modify the interest rate linearly until it reachesthe specified long-term rate (on the X-axis of Figure 2) in 2027. Note that thisanalysis incorporates only the impact of higher interest rates on the financing of thenational debt, not their impact on the overall economy.