header photo

Manish Saini

Why should the United States not default on its debt?

One concern remains with all the chatter about a possible US debt default: How can we avoid the economy from collapsing? After all, other countries have accumulated debt. The United Kingdom, for example, effectively increased its national debt by 250 percent. However, this does not guarantee that the United States would not wind up in the same scenario.

Many Americans are charmed by the Obama administration's recent tax cuts and spending spree, but the country's debt pile could be on the rocks shortly. As the economy improves, the national debt grows, with trillions of dollars in fresh borrowing on the horizon. Many government organizations and enterprises will be forced to foot the bill. And others like you may be left wondering what went wrong. In summary, the next few years will be turbulent. Some experts expect a fiscally charged roadblock shortly. That's an issue for a country whose economy has been shattered by the recession and has seen a series of economic booms and busts over the last few decades.

According to the Treasury Department, if the debt ceiling is not lifted by October 18th, the United States will default on its commitments for the first time in history. This would have a tremendous impact on the economy.

According to the Federal Reserve Bank, a four-month default would likely result in a 4% drop in real GDP. It would also cause unemployment to rise to over 9%.

Real GDP declined by 4.3 percent during the Great Recession. This recession, combined with the COVID-19 epidemic and the wars in Afghanistan and Iraq, resulted in significant increases in the national debt.

Treasury bond interest rates are at historically low levels. As a result, the federal government has few options for avoiding a default.

The United States is poised to enter a somewhat unknown debt area. A significant amount of the debt will be impossible for Washington to monetize, while a rapidly aging population will drive up healthcare expenditures. Both issues will exacerbate over time, necessitating politically tough decisions. In contrast to earlier periods, the federal government now has more control over the expanding national debt.

A fiscal crisis may need severe tax increases and spending reductions. Although the federal government can balance the majority of the debt by decreasing spending, servicing it may divert investment away from other vital sectors.

Due to mandated spending programs such as Social Security and Medicare, debt will also rise. These are the vital fiscal drivers of the federal government. If current trends continue, the federal government will run a $112 trillion deficit over the next 30 years.

If President Biden's budget ideas are implemented, the national debt will exceed 250% of GDP by 2050. This is nearly equivalent to the estimated defense spending. Annual interest expenditures on the federal debt would rise to 13.0% of GDP, or almost half of all national tax collections, throughout that period.

The Social Security and Medicare systems are to blame for these expenses. As the cost of these systems rises, the payroll taxes collected will need to be increased to fund the promised benefits. The costs will increase and become politically irreversible.

In the long run, the interest rate will decide Washington's fiscal policy. Interest rates will determine the length of time the government can borrow. Higher interest rates diminish savings and increase deficits. With interest rates rising, the federal government would need to find additional revenue to cover its interest costs.

Since World War II, the UK's public debt has grown by tens of billions of dollars. The Industrial Revolution, the Great War, two world wars, and, most recently, the financial crisis are all part of the UK's public debt history.

Although the UK's GDP is dropping, its public debt is not. Compared to the early 1950s, the current state of affairs is manageable. However, there are essential outliers.

As mentioned above, the coronavirus reduced tax income and pushed the government to increase spending significantly. On the other hand, establishing a welfare state tempered the nihilistic effect. Furthermore, the country's autonomous Central Bank was a lender of last resort. Despite these reasons, the British government's fiscal picture remains positive, with record borrowing and a projected budget deficit of 3.7% of GDP in 2019.

The United Kingdom's weak economic performance has put downward pressure on government spending, weighing on tax income and GDP. As a result, the Chancellor has commissioned a study by the Office for Budget Responsibility (OBR) on the best method to increase government revenue while decreasing spending.

Go Back


Blog Search


There are currently no blog comments.