ECON-UA 1 Lecture 25: 25

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25
Burden of Debt
= % of total income needed to pay interest on debt
=
Conclusions
1) For a given r, we can run deficits (amount government borrowing during the year)
forever (ie. it can add to debt) without raising the burden as long as %ΔDebt %ΔGDP
you can be running budget deficits and adding to debt, yet burden of debt
can be decreasing if %ΔDebt %ΔGDP
currently: nominal GDP 3% per year (due to rising prices and increased
production)
with constant r, debt could grow by (0.03)($14.3trillion) = $429Billion without
raising burden
(largest deficit we should run in 2017 to prevent burden)
Projected 2017 deficit - $594 billion
2) we’re not doing the above (keeping the debt growing less than or equal to the rate of
growth of nominal GDP), and we’re not projected to do that in the next 35 years
3) with no policy changes, project burden rising to seriously problematic level by 2045
By 2045: Debt Ratio - 1.41 (up from 0.77 now)
Congressional budget oce (CBO) assumes average interest rate on debt will rise
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