With $31 trillion of debt, the U.S. government has reached its borrowing capacity. President Biden and Republican House Speaker Kevin McCarthy have started talks on ways to raise the so-called federal debt ceiling. If they don’t come to an agreement, the U.S. could default on its debt and send the economy and financial markets into a catastrophic tailspin.

While $31 trillion is concerning, the number that both sides should really be focusing on is 4.3%. That’s the average budget deficit as a percent of gross domestic product that the bipartisan Congressional Budget Office projects from now until 2027.

Before getting into why, it’s important to put the current level of debt into perspective. It’s currently at 102% of GDP, rising from just under 80% before the pandemic and the surge in borrowing by the government to cushion the fallout on the economy. It’s also approaching the record 106% set just after World War II. Back then, though, the high level of debt accumulated during the conflict didn’t cause a problem for the economy, and in principle there is no reason the debt accumulated during the pandemic will do so now.

The difference is that the federal government ran a significant budget surplus of 1.6% of GDP in 1947 and 4.3% in 1948. In contrast, the Congressional Budget Office projects the government will run a deficit of 3.8% of GDP in 2023 and then an average deficit of 4.5% a year from 2024 until 2027.

These percentages might seem inconsequential relative to the amount of debt outstanding, which now exceeds the size of the economy. But to understand why they make such an enormous difference when it comes to the country’s fiscal health consider what happens when the government simply balances the budget, neither paying down nor adding to the debt. If the Congressional Budget Office is right and GDP grows to $37 trillion in 2032, the debt-to-GDP ratio would shrink to 63% all on its own. That’s right, the economy would grow out of all the debt piled on during the pandemic in less than 10 years. And if the U.S. ran a budget surplus, that would cause the ratio of debt-to-GDP to shrink even faster, just like after World War II.

Running a deficit has the opposite effect because the government needs to borrow to fund the shortfall. That’s especially true if the deficit is greater than the nominal growth rate of the economy – real GDP growth plus inflation. What makes things challenging now is that with the baby boomer generation moving into retirement and productivity still sluggish, about the best we can hope for in terms of real GDP growth is around 1.5% to 2% per year. Even factoring in the Federal Reserve’s 2% target rate for inflation, that would only bring the growth rate to around 3.5 to 4%, which falls short of what would be needed to shrink the deficit.

This is why the current deficit is potentially a bigger threat than the $31 trillion of debt outstanding. If the CBO’s deficit estimates are correct, it means the debt-to-GDP ratio will gradually rise rather than collapse as it did after Second World War. Does that mean a fiscal and financial crisis is imminent? No, as the U.S. has shown it can handle these levels of debt thanks to the dollar’s status as the world’s primary reserve currency, which creates inherent demand for U.S. Treasury securities.

That may not be the case if another crisis develops somewhere that demands an extraordinary fiscal response. In that scenario, U.S. debt could easily reach an unprecedented 130% of GDP or more, stoking inflation even further and requiring severe belt tightening by Congress and tighter monetary policy by the Fed, causing a deep recession that will be unavoidable. To take such a possibility off the table, the Biden administration and Congress should concentrate on bringing the budget into balance now while the economy is still fairly resilient. Otherwise, it may be too late.

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