Artificial intelligence is widely expected to transform businesses and reshape the labor market. But its biggest economic consequence could extend beyond companies and workers: AI driven productivity gains could also give heavily indebted governments a way to improve their finances.
The potential is significant, although highly uncertain.
A recent survey by Chicago Federal Reserve economist Ezra Karger and colleagues found that the median estimate among economists, AI experts, superforecasters and members of the public was for AI to add around 0.5 percentage points to annual US GDP growth through 2031. Economists were considerably more cautious, putting the expected annual boost at around 0.1 percentage points.
Even the lower estimate, however, could have meaningful fiscal consequences.
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Higher productivity allows businesses to produce more with fewer resources and can raise corporate profits. It can also increase workers’ productivity and potentially push up real wages. Both businesses and workers generate tax revenue, meaning stronger economic growth can improve government finances if additional spending does not absorb the gains.
That creates an unusual possibility: AI could indirectly become a tool for reducing government debt.
The US Faces a Limited Fiscal Windfall
The potential impact is particularly important for the United States, where government debt and persistent budget deficits have become structural problems.
The Congressional Budget Office currently projects that US federal debt held by the public will reach around 120% of GDP by 2036. Under a scenario in which AI adds 0.5 percentage points to annual GDP growth, estimates suggest the ratio could instead fall below 111% if the productivity gains primarily translate into higher corporate profits.
If workers capture half of the productivity gains through higher wages, the debt ratio could fall below 110%.
The difference comes partly from the tax system. Higher wages generally generate more income tax revenue than equivalent increases in corporate profits generate through corporate taxation.
Under the same assumptions, the US primary deficit in 2031 could decline from roughly 1.9% of GDP to around 1.3%. The overall budget deficit could fall from approximately 5.9% to 5.2%.
Those numbers are meaningful, but they would not eliminate America’s fiscal problem.
The United States continues to run large structural deficits, while its effective corporate tax rate is relatively low compared with many other advanced economies. As a result, much of the economic benefit generated by AI could remain in the private sector rather than flowing into government coffers.
There is also a major risk on the other side of the equation.
The AI Jobs Problem
AI driven productivity does not necessarily mean that everyone becomes better paid.
Businesses may achieve higher productivity by producing more with fewer employees. If automation leads to significant job losses, governments could face higher spending on unemployment benefits and other forms of social support.
That could offset part of the additional tax revenue generated by faster economic growth.
The Budget Lab at Yale has modeled more complex AI scenarios that incorporate some of these effects. Its analysis similarly suggests that AI could improve the US fiscal outlook, although the scale of the improvement would depend heavily on how productivity gains affect wages, profits, employment and government revenue.
This makes the distribution of AI’s economic gains almost as important as the size of the gains themselves.
Britain Could Capture More of the Benefits
The fiscal impact could be considerably different in countries with higher tax rates and smaller deficits.
Britain provides an important example.
Using similar productivity assumptions and the UK Office for Budget Responsibility’s baseline projections, estimates suggest that an AI driven boost of between 0.1 and 0.5 percentage points to annual GDP growth could significantly improve Britain’s public finances.
The OBR currently projects that UK debt will reach around 95% of GDP in 2031. Under the scenarios examined, that figure could fall to approximately 89%.
The difference is partly explained by Britain’s lower underlying growth rate and higher taxation. A similar productivity boost therefore represents a larger relative increase in economic activity, while the government can capture a greater proportion of additional wages and profits through taxation.
The effect on Britain’s deficit could also be substantial.
A 0.1 percentage point annual boost to GDP growth could reduce the projected budget deficit by around one percentage point by 2031. At the higher end of the productivity estimates, the deficit could be reduced by as much as 1.3 percentage points compared with current projections.
For a country expected to bring its deficit below 3% of GDP later this decade, that could represent a significant improvement in the government’s fiscal position.
AI Is Not a Debt Cure
The numbers illustrate why governments are increasingly interested in AI not simply as a technological transformation, but as a potential source of economic growth.
Yet there is an important distinction between higher productivity and healthier public finances.
AI can expand the economic base from which governments collect taxes, but governments do not automatically capture all of that additional wealth. The fiscal benefit depends on tax structures, wage growth, corporate profits, employment levels and public spending.
The distribution of AI gains could therefore determine whether the technology becomes a meaningful fiscal boost or primarily another source of private wealth.
The US and UK illustrate two different possibilities. A large economy with high deficits and relatively low effective corporate taxation may capture only a limited share of AI driven growth. A country with higher taxation and smaller deficits could potentially translate the same productivity gains into a much larger improvement in its fiscal position.
Ultimately, AI may give governments a new opportunity to grow their way out of some of their debt problems. But that outcome is far from guaranteed.
The decisive question may not simply be how much AI increases productivity, but who captures the gains and how much of that additional wealth reaches the public finances.
With information from Reuters.
