Economists are warning that the government’s budget deficit problem is causing income problems for Americans.
Last week, the Congressional Budget Office revised its estimate for this year’s government deficit upwards by $408 billion, or 27 percent, from its February forecast to $1.9 trillion.
Economists say paying back that debt could divert funds from private investment and slow wage growth.
“A sudden rise in debt could reduce wage income by as much as 10% within 30 years,” said Kent Smetters, a professor at the Wharton School of the University of Pennsylvania and director of the Penn Wharton Budget Model.
With a median household income of about $75,000, the average household would see an income loss of about $7,500 each year in today’s dollars, he said.
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How does the national debt affect paychecks?
The CBO said the estimated increase in the national debt was due in part to student loan relief, increased Medicare spending, and aid to Ukraine. It also projected that the budget deficit over the next decade will increase to $22.1 trillion, $2.1 trillion higher than the previous forecast.
To finance increased spending, governments issue debt — treasury bills and high-interest bonds — to attract investors. When investors put money into government debt, it comes at the expense of more productive private investment, in what economists call the “crowding-out effect.”
Private investment includes developing new products and technologies, borrowing money to build buildings and roads, and buying stocks and bonds in companies.
CBO estimates that every dollar of deficit leads to a loss of 33 cents in private investment, reducing economic growth and wages in the long run.
The CBO projects that the national federal debt will rise from 99 percent of gross domestic product in 2024 to 122 percent in 2034, exceeding the peak of 106 percent reached in 1946, just after World War II.
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Will Americans really see their wages fall?
No, because it’s a loss of potential income. That’s money that Americans will never receive.
Still, Americans, especially younger and future generations, will feel the costs from lower living standards: slower economic and wage growth, as well as potentially higher taxes and interest rates, economists say.
The federal government may have to raise taxes or interest rates on bonds to attract buyers to repay the debt. A 2019 CBO study found that for every 10% increase in the debt-to-GDP ratio, interest rates rise by 0.2 to 0.3 percentage points.
How can governments prevent this?
Many economists agree that a combination of slowing spending and increasing tax revenues would help reduce the budget deficit.
But whether a polarized Congress can agree on a plan is up for debate, they say.
“It’s easy to point the finger of blame, but both parties are responsible for our nation’s fiscal situation,” Sen. Joe Manchin, then a West Virginia Democrat and now an independent, Sen. Mitt Romney, R-Utah, Rep. Bill Huizinga, R-Mich., and Rep. Scott Peters, D-Calif., wrote in a January op-ed. “To get out of this mess, we need to put political posturing aside.”
“The national debt now exceeds $100,000 for every American. Given the dire nature of this crisis, continuing to turn a blind eye will only put the American Dream out of reach for our children and grandchildren,” they noted.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Contact her at mjlee@usatoday.com. You can also subscribe to our free Daily Money newsletter, which delivers personal finance tips and business news every Monday-Friday morning.
