19 Jul 2021
Posted in Business Fundamentals
Alarmingly high debt levels in the US will deter growth prospects in the coming years, says GlobalData
The COVID-19 induced spike in the US Government’s expenditure and the consequent rise in government debt reached an all-time high of 127% of GDP in 2020. Rising interest payments on debt in the US may lead to curtailing expenditure on other productive investments, which could hinder the country’s future growth potential. The US’s real GDP, which is forecasted to grow at a robust pace of 5.1% over 2021–2022, is expected to grow at a slower pace of 1.6% during 2023–2030, says GlobalData, a leading data and analytics company.
The US’s general government debt rose by 14.7% to US$26.6 trillion in 2020 due to a rise in unplanned expenditure to counter the impact of COVID-19. The overall debt level is further forecasted to rise by 13.2% to US$30.1 trillion by the end of 2021, according to GlobalData analysis. The 2021 debt percentage of GDP is expected to exceed the average debt level in advanced economies.
Gargi Rao, Economic Research Analyst at GlobalData, comments: “Post-2008’s financial crisis, the US Government continued to run the economy with huge budget deficits to spur economic growth. If the government continues with this approach without considering the long-running costs of higher debt and deficit, it may drive the economy into another financial crisis.”
Huge debt levels boost borrowing costs which in turn causes interest payments to shoot up. In the long run, this is expected to heighten the risk of a financial crisis for the US economy. Persistent debt levels may increase inflation levels and lead to loss of international confidence in the domestic currency. A rise in private and public borrowing costs poses significant downside risks to the financial and economic outlook of the US economy.
The US Government has been overspending, which has resulted in its fiscal deficit widening since 2008. The overall government deficit increased to US$3.32 trillion in 2020 from US$1.22 trillion in 2019 amid the COVID-19 pandemic. The government expenditure increased by 26.4% in 2020, compared to only 9.6% in 2008’s financial crisis.
The Biden administration recently proposed a US$1.9 trillion American Rescue Plan to boost short term growth at the cost of higher debt levels. While lower interest rates will spur borrowing, as older generations retire and add to unproductive spending, this could put further pressure on government finances over the medium to long term.
Rao adds: “The expansion of debt in the short run could lead to less fiscal capacity in the medium run, which could cripple the country’s policy responses at a time when the economy is in dire need of support. Implementing checks and balances to cut down on excessive government spending and investing in revenue-generating activities should be a focal point going forward. The government should also adopt policies to cut down on overspending, which has an adverse impact on the economy.”