Economists warn the unsustainable US debt surge that could exceed $60 trillion has raised global interest rates. According to testimony before the US Senate Finance Committee, this may impact emerging economies like India.
Washington, Mar 12: Economists have cautioned lawmakers that the United States is moving toward an unsustainable debt path that could spark global financial instability.
They warned during a Senate hearing that growing American deficits may drive up global interest rates and create ripple effects across emerging economies, including India.
Opening the hearing of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth on Wednesday, Senator Ron Johnson said the nation’s debt trajectory had become deeply concerning. He noted that the debt could soon reach and exceed $39 trillion, and added that it may “almost certainly surpass $60 trillion” within the next decade.
Johnson said Washington had failed to seriously confront the growing fiscal imbalance. “We still haven’t taken the first step in solving a problem, which is to admit we have one,” he told the panel.
He argued that federal spending surged during the Covid-19 pandemic and never returned to earlier levels. “There is absolutely no justification for that whatsoever,” he said, referring to the sharp increase in government spending in recent years.
Ranking member Senator Tina Smith agreed that the country faces a dangerous fiscal outlook but said both spending and falling revenues had contributed to the problem. “Deficits aren’t caused just by spending that’s too high. They are just as contingent on the revenue side of the ledger,” she said, calling the latest budget outlook “a grim picture”.
Phillip Swagel, director of the Congressional Budget Office, told lawmakers that the current trajectory of federal finances is historically unusual and unsustainable.
According to CBO projections, federal debt held by the public will rise from 99 per cent of GDP in 2025 to 120 per cent by 2036 and eventually to 175 per cent by 2056.
“Our projections continue to indicate that the trajectory for budget deficits is not sustainable,” Swagel said.
He added that stronger economic growth could reduce deficits but would not resolve the problem on its own. “Policy action is needed to reduce the budget deficit,” he said.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, warned that the growing debt burden now poses risks beyond economics. “Our national debt is the issue that everybody knows is a problem, but very few people are willing to do anything about,” she told senators.
She said the fiscal trajectory could weaken Washington’s ability to respond to crises and global challenges. “Our ability to respond to emergencies and major crises and our role in the world” could be affected if the trend continues, she said.
Martha Gimbel, executive director of the Budget Lab at Yale, said the consequences of rising debt are already affecting ordinary Americans through higher borrowing costs.
According to research cited in her testimony, rising government deficits have pushed up long-term Treasury yields. For a typical 30-year mortgage, she said the increase in borrowing costs amounts to about “$ 2,500 per year” or roughly “$ 76,000 over the life of the loan”.
Economists at the hearing also warned that a full-blown fiscal crisis in the US could send shockwaves through global financial markets. Swagel said such a crisis could lead to “sharply higher interest rates, a weaker dollar, lower investment, lower consumer spending, fewer jobs”.
Since US Treasury securities form the backbone of the global financial system, higher US borrowing costs often lead to tighter financial conditions worldwide. Analysts point out that rising US bond yields can influence capital flows, currency movements, and borrowing costs across emerging markets.
For countries like India, policymakers and investors closely monitor changes in US interest rates and Treasury yields. Such shifts can significantly impact global capital flows, exchange rates, and financing conditions across developing economies. (with IANS inputs)