We’re at a key juncture when it comes to US debt dynamics. Government debt is approximately equal to the value of GDP. In other words, there’s a c.100% debt/GDP ratio. This makes the mathematics relatively easy. Basically, when debt is the same size as GDP, debt dynamics are broadly determined by whether the growth in nominal GDP is above or below the average coupon print on the debt. Provided the former is higher than the latter, then the debt/GDP ratio can trend lower.
That is the case where the primary deficit is in balance, which is not the case for the US. The primary deficit is the fiscal deficit excluding interest payments. In the US, the primary deficit ran at around 4% of GDP in 2024 and is projected at around 3% of GDP in 2025. If we assume a 3% primary deficit, for the debt/GDP ratio to fall, then the value of GDP must grow by more than the average coupon print plus 3%. That’s a tough circle to square. For 2024,…
