How to think about the U.S. budget challenge

Henry Aaron

Journal of Policy Analysis and Management, 2010, vol. 29, issue 4, 883-891

Abstract: The long-term budget prospects of the United States are grim. Projected spending greatly exceeds projected revenue over the next few decades. Projected growth of health care spending accounts for more than all of the anticipated gap.

Without action to narrow the gap, accumulating deficits will drive up the ratio of debt to GDP. Interest payments will rise correspondingly. At some point, domestic and foreign holders of U.S. debt will come to doubt the capacity of the government to service this debt. At that point, they will demand sharply higher interest rates.

The combination of increasing debt and rising interest rates will cause debt service costs to explode. What follows would be some combination of collapsing investment, declining production, debt default, and inflation-in brief, a calamitous mess. That such a mess will occur is certain if budget deficits as large as those currently anticipated are realized. Precisely when is impossible to forecast accurately.

Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jpamgt:v:29:y:2010:i:4:p:883-891

DOI: 10.1002/pam.20536

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