US debt has increased, but burden of servicing it has fallen

Jason Furman (PIIE) and Lawrence H. Summers (Harvard University)
December 16, 2020
US debt has increased, but burden of servicing it has fallen

As a share of GDP, the cost of servicing US debt has fallen since 2000, even though federal debt has increased. In 2000, the US federal debt was 34 percent of GDP, relatively close to its post-war low. By the end of 2020, the debt-to-GDP ratio will have nearly tripled to over 100 percent of GDP. At the same time, the cost of servicing this larger debt has fallen, relative to the size of the economy, because of the widespread fall in interest rates across advanced economies.

An environment of low interest rates makes it easier to pay off debts. If economic growth rates exceed interest rates, debt will naturally shrink relative to the size of the economy. This situation also creates more space for primary deficits (noninterest spending minus revenue) without resulting in an unlimited explosion of debt.

Rather than focus on the size of US debt, policymakers should assess fiscal capacity in terms of real interest payments, ensuring they remain comfortably below 2 percent of GDP. By this measure, there is room for substantial additional fiscal support and needed public investments while maintaining a sustainable public debt.

This PIIE Chart was adapted from Jason Furman and Lawrence H. Summers’ working paper, "A Reconsideration of Fiscal Policy in the Era of Low Interest Rates,” presented at an event cohosted by the Peterson Institute for International Economics and the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, “Fiscal Policy Advice for Joe Biden and Congress.”

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Jason Furman Senior Research Staff

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