What is R Versus G and Why Does it Matter for the National Debt?

The national debt is currently around 99 percent of gross domestic product (GDP) and is projected to rise above its all-time high of 106 percent, which was reached shortly after World War II, in just three years. What is more, interest rates on federal borrowing have risen drastically over the past few years. The combination of higher debt levels and elevated interest rates have increased the cost of federal borrowing, which has prompted economists to consider the sustainability of the United States’ current fiscal trajectory. .

One approach to assess the sustainability of federal debt was popularized by Olivier Blanchard, in his speech as outgoing American Economic Association president, in 2019. That paper was written during a period of low interest rates and noted the relationship between the interest rate on government debt (R) and the growth rate of the economy (G): R less than G could imply a stable debt trajectory. However, Blanchard, as well as other economists and fiscal policy experts, recognized that the framework only holds true when the deficit excluding interest payments is small, which unfortunately is not the current case in the United States.

What Are R, G, and the Primary Deficit and How Are They Used to Consider Debt Ratios?

Evaluating debt ratios (and debt sustainability) using interest rates and economic growth rates requires understanding three concepts:

• R is the average interest rate on government debt, which measures the cost of borrowing.
• G represents the growth rate of GDP, a measure of the amount of goods and services produced in the economy.
• The primary deficit is the difference between annual revenues and spending, excluding interest costs.

The relationship between those three concepts can be used to determine debt sustainability. If R is greater than G, the money the federal government has to pay for its borrowing outpaces the growth rate of the economy so the debt-to-GDP ratio will rise even if the primary deficit is in balance. Alternatively, if R is less than G, the opposite holds: the debt-to-GDP ratio could decrease over time in conjunction with small primary deficits.

The United States’ Primary Deficit, R, and G

The framework of the relationship between R and G shows that the United States’ debt is unsustainable because the country has built in large primary deficits as a result of the structural mismatch between revenues and outlays. Such deficits are driven by an aging population and rising healthcare costs, accompanied by revenues that are insufficient to meet promises that have been made.

In recent history, the United States has benefited from an R that stayed below G. Over the past 30 years, average R (measured using the nominal interest rate on 10-year Treasury notes) was lower than average G (measured using nominal GDP growth); however, over a similar time horizon in the future, on average, R is projected to be higher than G.

Looking to the future, R will be higher than G beginning in 2030, according to the Congressional Budget Office (CBO). In addition, CBO projects primary deficits to widen simultaneously, leading to rapidly rising debt-to-GDP ratios.

Increasing debt-to-GDP ratios also influence R and G in ways that can exacerbate the projected difference between the two variables. High debt levels not only increase R as federal borrowing competes for funds in capital markets but also lower G by reducing long-term investments that create economic growth.

Conclusion

Assessing the relationship among R, G and the primary deficit can be a helpful way to look at the United States’ fiscal outlook. While the United States maintained low interest rates from 2009 to 2022 — allowing interest costs to remain relatively stable and below the economic growth rate — that trend has reversed. Interest rates are projected to stay higher, which would cause the debt-to-GDP ratio to rapidly expand in the near future. To improve the nation’s fiscal trajectory, policymakers must focus on reducing primary deficits to put debt on a more sustainable path.

Related: The National Debt Can Crowd Out Investments in the Economy — Here’s How

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