Last year, we introduced the theory of fiscal Congressional Budget Office expects under space as one approach to estimating how much current U.S. tax and spending policies, the debt countries can maintain without risking upward trajectory of debt quickly becomes sustainability and likely interest rate increases unsustainable. Although the debts taken on (Ostry et al., 2010, and Zandi, Cheng, and during the pandemic were necessary to prevent Packard, 2011). Taking the U.S. situation as an suffering on a global scale, something needs to example, Figure I-10 shows that the current be done going forward to start reining in gaps high-inflation, high-interest-rate environment between taxes and spending before financial does little to affect the sustainability of current markets begin to take action themselves. debt levels, as the two forces offset each other, The time is not now, but it is approaching. but if deficits are to average 5% as the FIGURE I-10 U.S. debt ratio is expected to remain flat even in a higher-rate, higher-inflation environment   Scenario Higher primary  defiits Scenario  Higher interest rates, higher inflation  U.S. debt/GDP Scenario  Higher interest rates,  tame inflation Baseline                Notes: Debt-to-GDP ratios were forecasted according to a standard debt accumulation equation. We used real GDP growth taken from July 2022 Congressional Budget Office (CBO) extended baseline projections. The other variables are defined as follows (based on 2022–2032 averages): In the base case, nominal interest rates were assumed to be 1.6%, inflation was assumed to be 2%, and the primary deficit was assumed to be 2%. We modifed those assumptions as indicated by the labels in the figure. For Scenario 1, we used 2.5% for the nominal interest rate. For Scenario 2, we used 2.5% for the nominal interest rate and 2.8% for inflation. For Scenario 3, we used 5% for the primary deficit. Sources: CBO July 2022 extended baseline projections and Vanguard, as of November 4, 2022. 15