The past twelve years have witnessed the only sustained, non-cyclical peacetime increase in the Federal debt/GDP ratio in US history apart from the Great Depression. In Discussion Paper No. 791, Research Fellow Willem Buiter estimates the `permanent primary gap' the permanent improvement in the primary deficit/GDP ratio needed to maintain solvency inherited by the Clinton Administration at 0.35-1.65% of GDP; its proposals for an average, cyclically-corrected primary Federal surplus of 0.13% of GDP for 1993-8 will yield an improvement of only 0.12-1.02% of GDP, so further fiscal tightening will be needed to maintain government solvency.

Even without endangering solvency, however, high debt risks excessive monetary growth and inflation and may also lead to financial crowding out, if the substitution of borrowing for current taxation redistributes resources from young to old. The US savings rate is already low by historical and international standards and it could be raised by measures to reduce the deficit, but countercyclical variations are also desirable for both Keynesian and neoclassical, tax-smoothing reasons.

Problems in financing the Clinton Administration's ambitious programmes to improve health care and insurance, education and training and research and development; to revitalize the inner cities, and to invest in the infrastructure of public transport and telecommunications are all likely to dwarf those of coping with inherited debt. Buiter notes that the Federal government spends less than 8% of GDP on purchases of current goods and services, while total general government receipts account for the smallest fraction of GDP of any industrialized country. US voters have to date been unwilling to bear the tax burden required by the Clinton Administration's agenda, so its main challenge is to build a coalition capable of raising the equilibrium share of current revenues in GDP towards the OECD average.

Public Debt in the USA: How Much, How Bad and Who Pays?
Willem H Buiter

Discussion Paper No. 791, June 1993 (IM)