The risk of a fiscal crisis depends on factors beyond the amount of federal debt. Ultimately, what matters is the ability to service the debt and the cost of doing so. Among the factors affecting that ability and cost are investors’ expectations about the budget and economic outlook, which can change over time, and about domestic and international financial conditions, including interest rates and exchange rates. Furthermore, the relationships between those factors and the risk of a crisis are uncertain and can shift—depending, in part, on the state of the economy. In CBO’s assessment, the debt-to-GDP ratio has no set tipping point at which a crisis becomes likely or imminent; nor is there an identifiable set point at which interest costs as a percentage of GDP become unsustainable. Indeed, CBO cannot reliably quantify the probability that a fiscal crisis might occur. Thus, the distribution of possible outcomes that the agency considered in preparing its baseline projections does not include the potential budgetary and economic outcomes of a fiscal crisis.

The risk of a fiscal crisis in the near future is not currently apparent in financial markets, even though the pandemic has increased the federal deficit and caused great uncertainty about the speed and scope of a recovery. However, financial markets do not always fully reflect risks on the horizon and, more importantly, the risk of a fiscal crisis could change suddenly in the wake of subsequent unexpected events. For example, a sudden rise in interest rates could lead investors to become concerned about the government’s fiscal position over the long term as their uncertainty grew as to whether the rise was temporary or signaled a long-run trend.

Risks of Other Disruptions

Even in the absence of an abrupt fiscal crisis, high and rising debt could generate persistent negative effects on the economy beyond those incorporated in CBO’s extended baseline projections, including a gradual decline in the value of Treasury securities and other domestic assets. High and rising debt could lead to moderate but ongoing increases in inflation expectations. Increases in federal borrowing could also lead to an erosion of confidence in the U.S. dollar as an international reserve currency. Among other effects, such developments would make it more difficult to finance public and private activity. Moreover, the increased dependence on foreign investors—who would hold larger and larger amounts of that high and rising debt—could pose other challenges, such as making U.S. financial markets more vulnerable to a change in the valuation of U.S. assets by participants in global markets.