Congressional Budget Office Director Phillip Swagel has warned that faster economic growth is unlikely to stabilize U.S. debt, even if GDP expands at more than double its current pace. With gross debt reaching $40 trillion and publicly held debt at 100% of GDP, simply keeping the ratio flat would require a massive, sustained economic boom.
The Growth Math Disconnect
Speaking at a Minneapolis Fed conference, Swagel estimated that with interest rates at 4%-5%, nominal GDP growth would need to reach 7%-8%, and real GDP growth would have to hit 5%-6% to stabilize the debt-to-GDP ratio. This stands in stark contrast to Treasury Secretary Scott Bessent’s recent assertion that 3% growth would allow the U.S. to "grow our way out" of the problem.
Swagel pointed out that while growth boosts revenue, it also increases federal outlays. Higher wages lift Social Security benefits, and a robust economy tends to push interest rates higher, adding to debt interest costs. "Growth alone will probably not be plausible to stabilize our fiscal trajectory," he added, noting that the remaining options are changes in spending and revenue—inherently political choices.
The AI Factor and Productivity
When asked by Minneapolis Fed President Neel Kashkari if AI could supercharge growth, Swagel noted that the CBO has detected an increase in total factor productivity. While the CBO’s upcoming forecasts will incorporate AI-driven growth, Swagel cautioned that the budget deficit is so deep that even this technological boost will not be enough to offset the fiscal trajectory.
The Fiscal 'Turbocharger'
Swagel highlighted the risk of an economic shock creating a "turbocharger" effect: an interest rate shock feeds into the deficit, which feeds into the debt, and subsequently feeds back into higher interest rates. Currently, long-term bond yields have surged to 24-year highs. While the bond market is still absorbing U.S. Treasury issues, the sheer scale of the debt is beginning to exert upward pressure on rates, with every 1-percentage-point increase in the debt ratio leading to a 0.015-percentage-point hike in long-term yields.
