Averting public debt sustainability crises: the United States case

In the aftermath of the pandemic crisis, inflation surged and central banks increased their target interest rates, raising concerns over the serviceability of public debts. Among the countries under observation, the United States saw its federal debt held by the public approach the size of the economy, reaching 94.55% of GDP. This paper investigates the implications of varying fiscal policies on American debt sustainability, employing scenario analysis to project potential future outcomes. The study begins with an extensive review of the past two decades of monetary and fiscal policies, encompassing the history of the Great Financial Crisis and the subsequent pandemic-related crisis. It examines the respective monetary and fiscal responses during these periods and transitions to the post-pandemic scenario characterized by an inflation surge that led to interest rate levels not seen in the last twenty years. Finally, the paper transitions to the core scenario analysis using the Buiter model. Three fiscal scenarios are examined: baseline, fiscal consolidation, and fiscal negligence. The baseline scenario presents the most likely situation, incorporating the Congressional Budget Office's forecasts for the primary balance. In contrast, the fiscal consolidation scenario explores the substantial fiscal efforts required to significantly reduce the debt-to-GDP ratio, highlighting the fiscal policies needed to ensure debt sustainability. The most critical findings emerge from the fiscal negligence scenario, which demonstrates that a lack of proactive debt management can lead to a long-term debt spiral, underscoring the urgency of timely fiscal intervention to prevent severe economic and social consequences.