The US national debt situation is one of the world’s worst

Third, the drop off in investment slows economic growth. An increase in the debt-to-GDP ratio of 10 percentage points would slow growth by 0.15 to 0.2 percentage points per year, according to the IMF.[8] While that number may seem slight, compounded over several years, the impact becomes severe.

Finally, significant inflationary pressure will result from high levels of debt. On one hand, if debt buyers lose their appetite for buying debt, then monetary authorities would have to print money to continue to fund the debt. On the other hand, inflation could be used to erode the value of existing debt by lowering the real value of currency and, thus, the real value of the stock of debt.[9] Indeed, inflation was partly responsible for enabling the U.S. to bring down its debt so rapidly after World War I.[10] Either way, the result is bad for consumers and savers, who see their purchasing power and savings drop.

With such significant consequences at stake, it is no wonder that the IMF monitors government debt levels very carefully. By 2015, advanced economies are projected to carry an average debt of 110 percent of GDP, with the U.S. trailing at 83 percent. While that is not as bad as Greece, for instance, debt that approaches 100 percent of GDP can trigger an IMF audit. This would be a fiscal embarrassment that would erode U.S. global economic leadership.

Preventing the Fall
The BIS stresses that “consolidations along the lines currently being discussed [by global leaders] will not be sufficient to ensure that debt levels remain within reasonable bounds over the next several decades.”[11]
Most strikingly, it also notes that tax increases would most likely not close the gap, either: “Given the level of taxes in some countries, one has to wonder if further increases will actually raise revenue.”[12]

For the U.S., legislative and policy reforms to Social Security, Medicare, and Medicaid should include the following:
Report long-term obligations. Congress fails to report the unfunded obligations of entitlements in its annual budget. This number should be prominently disclosed in the budget, and Congress should be required to have a stand-alone vote on any policy that would substantially add to that number.

Create long-term budgets for entitlements. Entitlements grow on autopilot, without annual review, and have first call on federal dollars. Instead, entitlements should be placed on limited, 30-year budgets that would be reviewed and debated by Congress every five years. This would put entitlement spending on a level playing field with other priorities and force Congress to spend within its means.

Make retirement programs fair but affordable. Entitlement spending promises debt-financed benefits for all retirees, regardless of income. Meanwhile, a welcome increase in life expectancy has resulted in unwelcome years of unaffordable benefits. To resolve these issues, entitlements should be better targeted to those most in need, and the eligibility age for these programs should be increased with longevity.

Avoiding Disaster
The warning shots fired by the IMF and BIS should be a wake-up call to global leaders to get public debt under control. The economic consequences of projected debt, if realized, would be devastating, and the prospect of triggering an IMF audit is embarrassing at best and politically untenable at worst.

In the U.S., the best way to prevent this disaster is to start with serious and prompt reform to age-related spending in Social Security, Medicare, and Medicaid entitlements.

Nicola Moore is Assistant Director of the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.