Can We “Grow Our Way” Out of Debt?

The U.S national debt stands at $40 trillion, but it won’t stand there long.  With the government running an annual budget deficit of 6 percent of gross domestic product (GDP), the debt will rise another $7 billion by the end of today—and each subsequent day.

Treasury secretary Scott Bessent recently made front-page headlines by asserting that “with 3% growth, we grow our way out of this.” But is he right? 

As shown in the graphic above, the U.S. debt-to-GDP ratio roughly stabilizes if the economy grows at 3 percent annually.  But this fact hardly settles matters. 

First, on a sustainable basis, 3 percent growth is tough.  Since 2000, the country has hit the 3 percent growth mark in a mere five calendar years.  And only one of those—2019—was under a Trump presidency.  The average thus far under Trump’s second term is 1.8 percent.  The Congressional Budget Office, as the graphic shows, projects roughly that growth rate going forward.  If the CBO is right, and Bessent wrong, debt-to-GDP soars.  Of course, this gap is vastly larger still if President Trump proceeds with his proposal to send all adult Americans a $5,000 check—which would add $1.3 trillion to the deficit. 

Second, even if Bessent is right, annual interest service costs, which now exceed defense spending by an enormous 16 percent, continue to rise.  As we showed in our last post, we are already seeing signs that rate-sensitive borrowers, who increasingly dominate the U.S. Treasury bond market, are demanding higher and higher rates as debt issuance rises.  If federal spending is to stay constant as a percentage of GDP, growing interest expense will have to eat into expenditure on actual government services essential to the welfare and security of Americans. 

Bessent’s call for complacence is therefore dangerous.  Growth is great—but it is reckless for Washington to declare the debt problem solved by simply adopting unrealistic projections.  Spending and revenue reforms are essential.  Here are some ideas that could cut deficits by about $250 billion a year. 

On the spending side, we would slow the growth of Social Security benefits for higher lifetime earners, and reform Medicare rules generating overpayments to insurers and hospital-owned outpatient clinics.

On the revenue side, we would impose a broad federal value-added tax (which leaves returns to saving and investment untaxed until spent), paired with a cash rebate for lower-income households. 

Yes, it is obvious why we don’t work in Washington.