AI could help governments cut debt — but unevenly

AI technology holds the potential to significantly enhance productivity among governments, although the distribution of benefits may be uneven. The estimated productivity gains from AI vary greatly, with the median estimate for US GDP growth growth from AI around 0.5 percentage point per year through 2031. Economists are more conservative than other groups, predicting only a 0.1 percentage point boost annually over the next five years.

Regardless of the specific figure, increased productivity can lead to higher corporate profits, potentially resulting in higher real wages or increased government tax revenues. This could help reduce budget deficits and the debt-to-GDP ratio, assuming all benefits accrue to businesses and workers.

However, the reality is more complicated. In the US, with high deficits and low tax rates, AI productivity gains may primarily benefit businesses, leaving government finances largely unaffected. In contrast, countries with higher tax rates and smaller deficits could see more significant improvements in their fiscal outlook. For example, the UK's debt-to-GDP ratio could drop from 95 per cent to 89 per cent, a decline roughly twice as large as the US.

AI productivity gains could also reduce budget deficits in the UK, potentially halving it if benefits are realized. Nevertheless, the effectiveness of these gains depends on factors like the economy's dynamism and the accuracy of forecasts. Ultimately, AI has the potential to improve government finances in certain scenarios, but its impact remains uncertain and context-dependent.