CEOs of major US corporations joined the debate over the federal budget mess on October 25, calling on Washington to put its fiscal house in order. However, they only endorsed a set of principles but did not specific policy proposals. They also tiptoed around the question of how to take the steps they have recommended without damaging the fragile economy. Nonetheless, the effort needs to be lauded for they are trying to get the attention of the powers-that-be in Washington to sort out the fiscal mess.
One thing clear even to us Indians watching the US debt problem is that the world’s largest economy is on an unsustainable fiscal path. Spending is rising and revenues are falling short, requiring the US government to borrow huge sums each year to make up for the difference. It faces staggering deficits. In 2011, total federal spending was $6.1 trillion, or more than 40% of gross domestic product (GDP) of $15 trillion. Only during World War II was the US federal spending a larger part of the economy. Total direct revenues stood at 32% of GDP in 2011, the lowest level since 1950. The difference of total spending and total direct revenues—federal deficit—was a staggering $1.3 trillion. As of last year, the gross public debt was an overwhelming $17.6 trillion.
Federal debt this high is unsustainable. It is bound to drive up interest rates sooner than later for all borrowers in the US—businesses and individuals—and curtail economic growth by crowding out private investment. That’s one of the reasons why CEOs of major corporations have now joined the debate. By making it more expensive for entrepreneurs and businesses to raise capital, innovate, and create jobs, rising government debt could reduce per-capita GDP. If debt grows higher, the federal government may even have difficulty borrowing funds at an affordable interest rate in the future.
Large debt will put America at risk by exposing it to countries such as China and middle-eastern countries, who are its biggest external creditors. External creditors currently own more than half the US public debt. In a worst-case scenario, investors could lose confidence in federal government’s ability or willingness to repay its loans—possibly triggering a debt crisis. This could impact the rest of the world and even India by decreasing trade and revenues for our software companies, BPOs and, in general, for exporters of goods and services, which could possibly push our economy into a