A University of Pennsylvania economist’s scenario says an economy that misses AI investment could see public debt triple by 2035 if borrowing costs rise and its primary budget stays balanced.
In a calculation posted on X, Jesús Fernández-Villaverde starts with government debt at 100% of gross domestic product in 2025 and assumes a balanced primary budget thereafter. The example compares an AI-adopting economy, using the United States as an example, with a hypothetical zero-adoption bystander, using Spain as an example. They share an integrated financial market, while the bystander’s trend growth stays at 1.6%.
With unit task elasticity, keeping debt at 100% of GDP would require primary budget surpluses equal to 11% of GDP in 2030 and 26% in 2035, Fernández-Villaverde wrote. The required surplus reaches 44% indefinitely. If the government instead maintains a balanced primary budget, the model shows the debt ratio doubling by 2033 and tripling by 2035.
The fiscal calculation draws on a rate scenario in Fernández-Villaverde’s paper, Saving for the Machines, where the 10-year real yield rises from 5.1% to 13.6% on impact. For comparison, the U.S. Treasury’s daily par real-yield table recorded a 10-year yield of 2.64% on Oct. 22, 2026. Treasury says the daily reading uses secondary-market quotes gathered by the Federal Reserve Bank of New York at about 3:30 p.m. ET.
Fernández-Villaverde’s debt exercise rolls over government borrowing at the short-term rate. He cautioned that a government issuing 10-year debt could face higher long-term yields sooner. He also said capital flowing abroad to fund machinery could reduce the bystander’s output and tax base, although residents may earn returns by investing in the machines and the government could tax some of that income.
Fernández-Villaverde described the result as “a benchmark, not a forecast.” Tyler Cowen, who shared the calculation in a Marginal Revolution post, said a scenario in which Spain adopts no AI is extreme. Cowen said the country could benefit from scientific advances made abroad and noted that long-run capital supply may be elastic.
