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Guide

Federal debt policy in an era of low interest rates: a guide to the issues

Publisher
Interest rates Budget Fiscal policy Government expenditure Public debt United States of America
Description

Economists and others have worried about the long-run outlook for the federal debt for decades, recognising that the ageing of the baby boom generation would lead to budgetary pressures associated with increased spending on entitlements like Social Security and Medicare.

But debt has increased sharply in recent years for other reasons, including the effects of the Great Recession and the current COVID-19 recession. Looking forward, the retirement of the baby boom generation will put increasing pressure on the federal budget, and without changes in legislation, debt will continue to climb in coming decades.

As discussed in more detail in this report, this increase in debt has not been accompanied by the rise in interest rates that economists would have predicted. Instead, interest rates have fallen sharply. This decline in interest rates makes debt much less costly and has led some economists to rethink their stance on federal debt and federal borrowing. Most economists believe that changes in the federal budget—increased taxes or reduced spending—will eventually be necessary, but many feel that making changes now is not necessary, and that other problems confronting our country, like high and rising inequality and global climate change, should be higher priorities in the near term.

This guide develops these ideas in greater detail. The first section provides a brief overview of the federal budget, including a discussion of recent trends in federal debt and some basic information about where the government gets its money and what it spends it on. The second section discusses the long-run fiscal challenges associated with population ageing. The third section discusses the economics of debt accumulation—whether high debt is a problem, and, in particular, whether recent declines in interest rates affect how policymakers should deal with the debt.

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