Can Economic Growth Alone Fix the Federal Deficit?
Insights from Recent Research
Publicly held debt of the U.S. government now roughly equals annual output. More worryingly, the Congressional Budget Office projects that federal debt will rapidly rise further relative to output under current policies—it is projected to reach 181% in 30 years.
That path is not only unstainable, but the research shows that once the debt-to-GDP ratio reaches about 100% economic growth is negatively impacted (see the 2011 study “The Real Effects of Debt,” the 2013 study “Does High Public Debt Consistently Stifle Economic Growth?,” the 2020 study “Debt and Growth: A Decade of Studies” and the 2021 studies “The Impact of Public Debt on Economic Growth” and “Public Debt and Economic Growth: Panel Data Evidence for Asian Countries.”). In addition, the government’s capacity to respond to emerging problems is lessened, increasing the risk of a fiscal crisis.
Douglas Elmendorf, Glenn Hubbard, and Zachary Liscow, authors of the May 2025 paper “Policies to Reduce Federal Budget Deficits by Increasing Economic Growth,” investigated whether changes in specific economic policies could boost U.S. economic growth enough—and at a sufficiently low cost—to meaningfully reduce federal budget deficits.
Why Growth Matters—But Has Limits
A May 2025 paper by Douglas Elmendorf, Glenn Hubbard, and Zachary Liscow, “Policies to Reduce Federal Budget Deficits by Increasing Economic Growth,” explored whether targeted economic policies could spur enough growth to meaningfully reduce federal deficits. They note that slower population growth and lagging productivity gains have contributed to subdued economic growth in recent years. While faster growth would improve living standards and help support an aging population, it also boosts tax revenue and makes existing debt less burdensome relative to the economy.
However, their research—and the broader academic literature—makes clear that even robust economic growth alone cannot stabilize federal debt. Direct fiscal adjustments, such as tax increases or spending cuts, remain essential.
Policy Areas with Growth Potential
Elmendorf, Hubbard, and Liscow examined seven policy domains that could enhance growth and, by extension, help reduce deficits:
High-Skilled Immigration: Increasing the number of workers with advanced STEM degrees could reduce deficits by about $25 billion per 100,000 additional immigrants over a decade, excluding interest savings.
Housing Regulation: Easing land use and construction rules could lower housing costs, boost construction, and improve labor mobility—raising productivity and reducing the debt-to-GDP ratio.
· Safety Net Programs: Analyzing the net benefits is complicated as they are typically very long-term in nature and depend on how funded (taxes or debt which crowds out private investment).
Electricity Transmission Regulation: Investing in transmission infrastructure could yield significant net benefits, but regulatory barriers currently stifle progress. Streamlining permitting and aligning utility incentives could unlock growth. In 2024, the U.S. Department of Energy estimated that $1 spent on electricity transmission lines that enhanced access to renewable energy sources would produce benefits with a net present value between $1.60 and $1.80. The Department also estimated that if the country achieved a 90-percent reduction in greenhouse gas emissions from 2005 levels by 2035, the net present value through 2050 of improving electricity transmission would be roughly $380 billion. Yet, the United States is currently building very little long-distance transmission capacity.
Government R&D Support: Tax incentives for research and development may have a positive net budgetary effect, even if not fully self-financing in the short run.
Business Tax Policy: Lowering profit taxes and increasing investment incentives can raise capital, output, and wages, but must be weighed against their direct impact on deficits.
Infrastructure Permitting: Simplifying permitting laws can accelerate growth and help narrow budget gaps.
Key Findings
Growth-Enhancing Policies Alone Are Insufficient: While growth-promoting policies can help, they are not enough by themselves to stabilize the federal debt. Even significant improvements in economic growth from policy reforms would not eliminate the need for either explicit tax increases, spending cuts, or a combination to keep debt under control. With that said, the impact of growth stimulating policies can be significant.
· The 2025 CBO report “implies a 0.5 percentage point increase in annual total factor productivity growth throughout the coming decade would, by the end of the decade, raise inflation-adjusted GDP by 7 percent, reduce the budget deficit by 1.2 percent of GDP, and make debt held by the public roughly 12 percent of GDP smaller. In dollar terms, the budget deficit would be nearly $400 billion smaller by the end of the decade, and debt would be nearly $2 trillion smaller.”
· “Based on CBO’s estimates, if productivity increased 0.5 percentage point per year more quickly than expected during that whole period, then inflation-adjusted gross national product (GNP) per person would be 17 percent higher than otherwise after thirty years, interest rates would be 0.5 percentage point higher, and debt held by the public would be 42 percent of GDP smaller.”
· If economic growth is spurred by tax cuts or spending increases, the additional debt arising directly from those policy changes works in the opposite direction from the reduction in debt stemming from faster growth.
Partial Relief for Fiscal Adjustments: Implementing growth-enhancing policies can reduce the magnitude of tax hikes or spending cuts required to stabilize the debt but cannot fully replace the need for such measures.
Regulatory Changes: They tend to offer greater promise in achieving these goals than tax or spending changes because cuts in taxes or increases in spending directly widen budget deficits, so those changes need to have very potent impacts on growth if they are to improve budget outcomes enough to offset the direct widening of deficits.
Evidence Gaps: There is a dearth of robust research on the real-world impacts of many proposed growth-enhancing policies, especially regarding their potential to constrain federal debt. They stressed the need for more evidence to guide policy design and evaluation.
What the Numbers Say
The CBO estimates that a 0.5 percentage point increase in annual productivity growth over the next decade would raise real GDP by 7%, reduce the budget deficit by 1.2% of GDP, and shrink the debt by nearly $2 trillion by 2035. Over 30 years, such productivity gains could make per capita GNP 17% higher and reduce the debt-to-GDP ratio by 42 percentage points.
However, if growth is spurred by tax cuts or spending increases, the resulting higher deficits can offset the benefits of faster growth. Regulatory reforms, which often do not directly worsen the deficit, tend to offer greater promise for improving fiscal outcomes.
Key Takeaways
Growth Helps, But Isn’t Enough: Even ambitious growth policies cannot fully stabilize federal debt without direct fiscal measures.
Regulatory Reforms Show Promise: Changes that boost growth without increasing deficits—like regulatory streamlining—are especially valuable.
Evidence Gaps Remain: More research is needed on the real-world effects of growth-enhancing policies, particularly their impact on debt sustainability.
A Broader Fiscal Strategy Is Essential: Policymakers should view growth-oriented reforms as one component of a comprehensive approach that includes tax and spending adjustments1
Conclusion
Growth-oriented policies can play a meaningful role in reducing federal deficits, but they are not a standalone solution. Direct fiscal adjustments remain unavoidable, and a broader evidence base is needed to guide effective policy design for both economic growth and fiscal sustainability.
Larry Swedroe is the author or co-author of 18 books on investing, including his latest Enrich Your Future. He is also a consultant to RIAs as an educator on investment strategies.