Interest on National Debt Threatens U.S. Economic Stability, CBO Director Warns House Panel

The leader of the Congressional Budget Office (CBO) sounded the alarm on the escalating national deficit and interest expenses during a hearing before the House panel, emphasizing potential consequences for the economy and government resources.

Key Points:

• CBO Director Phillip Swagel cautioned lawmakers about the swelling national deficit and its associated interest costs.
• A recent CBO report projected a $1 trillion annual increase in the U.S. budget deficit over the next decade.
• Swagel highlighted concerns regarding the sustainability of promised benefits, particularly in social security, under current fiscal trajectories.

In his testimony, CBO Director Phillip Swagel underscored the dire implications of burgeoning interest expenses on the national debt, suggesting potential repercussions for the U.S. economy in the foreseeable future.

Swagel expressed concerns that mounting interest costs could encroach upon other vital government expenditures and pose a substantial risk to economic stability in the coming years.

The CBO’s latest semi-annual report, released on Feb. 7, painted a troubling picture of the nation’s fiscal outlook. It anticipated an annual increase of $1 trillion in the U.S. budget deficit over the next decade, with projections indicating a rise from $1.6 trillion in fiscal year 2024 to $2.6 trillion by 2034.

Furthermore, the report indicated that net interest payments, as a percentage of gross domestic product (GDP), are poised to surpass non-defense discretionary spending by 2024, reaching 3.9% of GDP within a decade.

Escalating national debt tied to several factors

Swagel attributed the escalating national debt to several factors, including high interest rates, an aging population, and escalating federal healthcare expenditures. The CBO forecasts the national debt to soar to an unprecedented 116% of GDP by the end of 2034.

Fiscal Responsibility Act of 2023

Addressing the committee’s concerns, Swagel acknowledged the positive impact of the Fiscal Responsibility Act of 2023 in marginally reducing the deficit. This bipartisan legislation, negotiated by former GOP House Speaker Kevin McCarthy, aimed to raise the debt ceiling while imposing federal spending caps.

Democrats on the committee advocated for comprehensive measures to address the deficit, emphasizing the need for tax code reforms to bolster revenue. They criticized previous tax cuts, particularly those benefiting the affluent, as exacerbating the deficit.

Swagel also highlighted the potential economic benefits of increased immigration, citing projections that higher net immigration could drive GDP growth by approximately $7 trillion over the next decade, while also boosting government revenue by around $1 trillion compared to baseline estimates.

However, he cautioned that immigration could entail increased government spending and potentially lower average wages due to productivity differentials across industries.

Looking ahead, Swagel informed lawmakers that the next deficit update, scheduled later this year, will incorporate President Joe Biden’s proposed budget and any new legislation passed by Congress.

Impact on the Dollar Value, Inflation Worries, and Interest Rate Hikes:

The ballooning national debt and rising interest costs carry significant implications for the average American, particularly concerning inflation and interest rates. As the government allocates more resources towards servicing the debt, there’s a heightened risk of inflationary pressures. Central banks might respond to these concerns by implementing interest rate hikes to curb inflation, potentially leading to increased borrowing costs for consumers and businesses. This, in turn, could impact the purchasing power of the dollar and contribute to economic uncertainty.

Negative Impact on the Stock Market and the Case for Investing in Gold:

The escalating national debt and associated economic uncertainties could negatively affect the stock market. Investors may become wary of heightened volatility and potential downturns in equities. In such turbulent times, diversifying one’s investment portfolio with stable assets like gold and precious metals could provide a hedge against market volatility and currency depreciation. Gold, in particular, has historically served as a safe haven during times of economic uncertainty, making it an attractive option for investors seeking to safeguard their wealth amid fiscal challenges.

In conclusion, the warning signals from the CBO regarding the national debt underscore the importance of prudent fiscal management and diversified investment strategies to mitigate risks and protect long-term financial stability.