Secular stagnation and fiscal crisis in the United States and China

Abstract

One of the consequences of the secular decline of economic growth has been the developing fiscal crisis in the leading capitalist economies. This paper projects possible developments of fiscal crisis in the United States and China, two largest economies in the world. Using projections of future economic growth and plausible assumptions about government primary deficits and real interest rates, future trajectories of government debt to GDP ratio can be established. Under the “reference case” scenario, the US government debt to GDP ratio is projected to rise to 222 percent implying government deficit to GDP ratio of 12–16 percent. China’s government debt to GDP ratio is projected to reach 139 percent by 2050 under the “reference case” scenario and likely to stay on unsustainable trajectories after 2050. Failure to resolve fiscal crisis in the leading capitalist countries could be one of the symptoms indicating that the existing social system is approaching its historical limit.