BY COMFORT OGBONNA
An artificial intelligence-driven productivity surge, if it fully materializes, could give major economies more breathing room to address mounting public debt burdens, economists say. But while faster growth may ease fiscal pressures at the margin, it is unlikely to single-handedly resolve the structural imbalances weighing on government finances.
The fiscal stakes are enormous. Public debt across most advanced economies already exceeds 100% of gross domestic product and is projected to climb further. Ageing populations, rising healthcare and pension obligations, higher interest costs, and increased spending demands for defense and climate initiatives are all contributing to a deteriorating long-term outlook.
Policymakers in the United States have expressed optimism that AI-driven innovation could boost economic growth. Economists argue that widespread adoption of advanced automation and generative AI tools has the potential to lift the global economy out of the productivity slowdown that has persisted since the 2008 financial crisis. By enhancing worker efficiency and allowing employees to focus on higher-value tasks, AI could increase output without proportionally increasing labor inputs.
Stronger economic growth would, in theory, make existing debt burdens more manageable by expanding the denominator of the debt-to-GDP ratio and increasing tax revenues. It could also reduce the risk of sharp market reactions from bond investors concerned about fiscal sustainability.
To estimate the potential long-term impact, the Organisation for Economic Co-operation and Development and several prominent economists shared preliminary projections. Filiz Unsal, the OECD’s deputy director of economic policy and research, said that if an AI-driven productivity boost also raises employment, public debt across OECD countries including the United States, Germany and Japan could fall by roughly 10 percentage points relative to baseline projections.
The OECD expects debt across its member economies to reach around 150% of output by 2036. A 10-point reduction would still leave debt levels well above today’s roughly 110%, highlighting that productivity gains would mitigate, not eliminate, fiscal pressures.
Much hinges on how AI reshapes labor markets. If job creation ultimately exceeds job losses from automation, tax revenues could rise alongside productivity. But if employment declines or if firms retain most of the gains as profits without significantly increasing wages, the fiscal dividend may be smaller than hoped.
In the United States, two economists projected that, under favorable scenarios, debt could rise more gradually to about 120% of GDP over the next decade from roughly 100% today. A third economist saw little meaningful change.
“Productivity is like magic. It helps the fiscal dynamics dramatically,” said Idanna Appio, a former economist at the Federal Reserve Bank of New York who is now a fund manager at First Eagle Investment Management. Still, she cautioned that “our fiscal problems are well beyond what productivity can fix.”
For now, S&P Global Ratings does not factor in a significant fiscal boost from AI by the end of the decade. Mark Patrick, head of macro and country risk at Teachers Insurance and Annuity Association of America, said the most optimistic scenario would be one in which rapid growth “saves” fiscal balances, but added that such an outcome is far from assured.
The potential impact is also likely to vary across countries. OECD research suggests AI adoption could lift productivity in Britain at a pace similar to the United States. However, the gains in Italy and Japan may be roughly half as large due to slower adoption rates and smaller AI-intensive sectors.
Demographics remain the core challenge. Kevin Khang, head of global economic research at Vanguard, said ageing populations and entitlement programs tied to them are the primary drivers of rising debt. AI may buy time, but structural reforms would still be necessary to restore fiscal balance.
Khang views a scenario in which AI lifts average U.S. growth to about 3% annually through 2040 as plausible. By comparison, the Federal Reserve estimates long-term potential growth closer to 2%. Under Khang’s stronger-growth scenario, U.S. debt might stabilize near 120% of GDP by the late 2030s. If AI underperforms and growth slows while borrowing costs rise, he projects debt could climb as high as 180% — a level that could provoke market instability.
Bond markets have become increasingly sensitive to fiscal policy since yields surged across advanced economies following the pandemic. Investors have shown little tolerance for unchecked borrowing, and sudden shifts in sentiment can quickly raise financing costs.
Appio noted that declining U.S. immigration compounds demographic headwinds. A shrinking labor force could offset gains from higher productivity, dampening the overall fiscal benefit of AI.
On the revenue side, economy-wide productivity improvements should expand the tax base. However, if AI primarily boosts profits or capital income — which are often taxed at lower rates than wages — governments may capture less of the upside. On the spending side, while public-sector efficiency gains could reduce certain costs, stronger growth may also increase wage-linked expenditures.
Kent Smetters, director of the University of Pennsylvania’s Penn Wharton Budget Model, expects only a modest reduction in U.S. debt over the next decade even under stronger growth assumptions. Programs such as Social Security, which account for about one-fifth of federal spending, are indexed to wage growth. If productivity lifts wages, benefit payments would rise accordingly, limiting fiscal savings.
“There are debt costs as well,” economists note, since higher productivity could push up real interest rates. Whether growth consistently outpaces borrowing costs will be critical in determining debt sustainability — a question already being debated within the Federal Reserve.
Ultimately, the outlook remains uncertain. While an AI productivity boom could significantly improve fiscal dynamics, it is not a guaranteed solution. A recession or financial shock could quickly derail growth before AI’s benefits fully materialize.
As Christian Keller, global head of economics research at Barclays, put it, the risk is that “the AI boom may not come quick enough before the market gets nervous about the fiscal trajectory.”
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