Key Points

  • The Peter G. Peterson Foundation said Monday that under current law, the increase in federal debt over the next decade will push up borrowing costs, reduce private investment by 13.6%, and shrink the size of the economy by $340 billion.
  • Citing analyses by EY and the Congressional Budget Office, the foundation noted that U.S. debt as a share of gross domestic product (GDP) will rise from the current 100% to 117% by 2035, and further to 156% by 2055. The Peterson Foundation's projections also show that the U.S. will lose 1.2 million jobs over the next decade, with wages shrinking by 0.6%.
  • These projections do not account for current efforts by U.S. President Donald Trump and Republican lawmakers to expand federal spending and prevent the 2017 tax cuts from expiring. The foundation said that if these changes become law, they "would significantly raise deficits and debt levels above those projected under current law."

Deeper Analysis

Monday marked the first bond trading day after Moody's Ratings downgraded the U.S. sovereign credit rating on Friday, with borrowing costs spiking in early trading before retreating. Moody's cut the U.S. debt rating from Aaa to Aa1, citing a bleak fiscal outlook.

The yield on the 10-year U.S. Treasury note, a benchmark for corporate and consumer loans, rose from 4.48% to as high as 4.56% at the start of trading before easing back to 4.46%.

Moody's said in a statement that the downgrade "reflects a rise in government debt and interest payment ratios to levels significantly above those of similarly rated sovereigns over more than a decade."

Moody's also noted: "We believe that fiscal proposals currently under consideration would not deliver a substantial multi-year reduction in mandatory spending and deficits."

Moody's said that if Trump and the Republican-controlled Congress extend the 2017 Tax Cuts and Jobs Act, it would add about $4 trillion to the primary fiscal deficit (excluding interest payments) by 2035.

Moody's stated: "Without adjustments to taxes and spending, we expect budget flexibility to remain limited, with mandatory spending (including interest payments) rising from about 73% of total spending last year to about 78% by 2035."

The Peterson Foundation believes that in the coming years, federal revenues may not keep pace with the growth in debt service costs and federal spending, especially on benefit programs such as Social Security and Medicare.

The foundation said: "As these federal obligations grow without reform, policymakers will face increasingly difficult choices in addressing the structural imbalance between spending and revenue."

According to the foundation's estimates, for every percentage point increase in the debt-to-GDP ratio, interest rates rise by 0.02 percentage points.

BofA Securities analysts said in a report Monday: "The timing of this downgrade is no coincidence. With tax cuts and tariff policies still pending, Moody's seems to be signaling that it believes these policy changes will, on balance, put the U.S. on a worse fiscal trajectory."

The analysts added: "The question now is whether this downgrade will push congressional Republicans toward a more responsible fiscal package—that is, smaller or less front-loaded tax cuts, and/or more spending cuts. This would be less favorable for growth in the short term, but better for America's long-term fiscal health."

The Peterson Foundation said the swelling federal debt will weigh on consumers, with per capita annual income projected to shrink by $1,000 within 10 years, $3,240 within 30 years, and $5,210 within 50 years.

The foundation said this damage will "materialize gradually as the accumulation of debt over time puts upward pressure on long-term interest rates."

"The continued increase in federal borrowing is expected to prompt investors to demand higher yields due to rising risk and supply-demand effects," the foundation said.

According to the foundation, the growing federal demand for capital will "crowd out" private investment, thereby weakening economic growth and job creation.

Michael Peterson, CEO of the Peterson Foundation, said in a statement Friday: "For those looking for a signal on when to stop adding to the national debt, Moody's downgrade is the clearest warning yet. It is unacceptable for a great country like the United States to damage its own credit rating. We have many options to address this issue, and with leadership, it can be done quickly."