Treasury Secretary Janet Yellen expressed confidence Wednesday that the U.S. has enough fiscal space to cover trillions more in spending on investments in the U.S. economy but said the federal government would eventually need to pare down the mounting debt.
In testimony before a Senate panel, Yellen said that she believes the U.S. can afford to invest trillions in projects meant to boost productivity despite the national debt exceeding historic highs thanks to years of low borrowing costs.
Yellen was asked by Sen. Richard Shelby (R-Ala.) about her 2017 comments expressing qualms about the U.S. public debt-to-gross domestic product (GDP) ratio while she was chair of the Federal Reserve Board. She said then that the country’s debt-to-GDP ratio of roughly 75 percent was a cause for concern.
Though the U.S. debt-to-GDP ratio has since risen above 100 percent, Yellen said Wednesday that years of downward pressure on interest rates has given the country more room to spend.
“My views on the amount of fiscal space that the United States, I would say, have changed somewhat since 2017,” Yellen said.
“Interest payments on that debt relative to GDP have not gone up at all, and so I think that’s a more meaningful metric of the burden of the debt on society and on the federal finances.”
The excessive build-up of federal debt had long been linked to rising borrowing costs for countries that could plunge them into severe inflationary spirals. A growing number of economists, however, have questioned the strength of that connection — particularly in the U.S., given the dollar’s importance to the world economy — as interest rates fell despite the rising debt.
Yellen said that while the U.S. likely has more room to spend than she once believed, the country will need to chart a more sustainable path once it can afford it. She added that investments in infrastructure, job creation and training would help the U.S. achieve fiscal health in the long run by improving economic productivity.
“It certainly doesn’t mean that anything goes,” Yellen said. “Longer run, we do have to raise revenue to support permanent spending.”
Yellen’s comments come as the Biden administration prepares to propose roughly $3 trillion in spending on infrastructure, green energy, climate resilience and job training, likely financed in part by tax increases for corporate income, high-earning households and financial asset sales.
Yellen told the House Financial Services Committee on Tuesday that the White House plans to explore how to raise revenues “in a fair way” to cover investments in infrastructure, a priority for the administration and Democratic lawmakers.