AI productivity may slow debt growth in major economies

Economists suggest that while a potential artificial intelligence productivity surge could offer major economies a reprieve to address strained public finances, it is unlikely to resolve the underlying debt crisis independently. With debt levels exceeding 100% of output across most developed nations, the pressure of ageing populations, rising interest costs, and spending requirements for defense and climate change remains significant. In the United States, policymakers are optimistic that AI can reverse a post-2008 productivity slump by enhancing worker efficiency. Higher economic growth could potentially stabilize government spending and debt loads, reducing the risk of intervention from bond vigilantes.

Filiz Unsal, the OECD’s deputy director of economic policy and research, notes that an AI-driven productivity surge could lower debt across OECD member states, including Germany and Japan, by approximately 10 percentage points from a projected 150% of output by 2036. However, this would still represent a notable increase from current levels of around 110%. Much will depend on whether job creation eventually outweighs any job losses from automation, as well as whether firms pass on higher profits by raising wages.

"Productivity is like magic... It helps the fiscal dynamics dramatically."

Idanna Appio, a fund manager at First Eagle Investment Management, warns that fiscal problems are likely beyond what productivity alone can fix. While AI could boost productivity in the United Kingdom at rates similar to those in the U.S., the impact may be halved in Italy and Japan due to slower adoption rates and smaller sectors capable of leveraging the technology.

The credit rating agency S&P Global Inc. currently assumes no significant impact on public finances before the end of the decade. Mark Patrick, head of macro and country risk at TIAA, suggests that while the administration hopes to be saved by the bell, it is not a certainty that can be relied upon. Kevin Khang, head of global economic research at Vanguard, emphasizes that the core issue remains demographic.

"The root of the debt issue is with ageing demographics and the entitlements that are tied to that."

Khang projects that AI could boost U.S. growth to an average of 3% through 2040, potentially slowing debt growth to 120% of output. Without such a boost, debt could soar toward 180% as growth slows and market pressures increase borrowing costs. There are also concerns regarding tax revenues and public spending. If AI automation leads to job losses or if profits are concentrated in capital rather than labor, tax revenues may underperform. Furthermore, Kent Smetters of the Penn Wharton Budget Model points out that higher productivity often leads to higher private-sector wages, which in turn increases the cost of indexed government benefits like social security.

The financial sector remains cautious about the timing of these benefits. Christian Keller, global head of economics research at Barclays PLC, suggests that a recession could disrupt the fiscal trajectory before the AI boom fully materializes.

"A recession could mean the AI boom may not come quick enough before the market gets nervous about the fiscal trajectory."