The national debt is a ticking time bomb and lawmakers need to prioritize addressing and defusing it. According to the Congressional Budget Office’s (CBO) most recent calculations, current policies put the federal government on a path to a level of unsustainable publicly held debt. Coupled with the challenges of government IOUs for non-public debt, as has been discussed with Social Security, you would think lawmakers would be motivated to right our fiscal ship. But the actions of this Congress and the current administration show Washington is inclined to do the exact opposite.
On August 21, CBO released a report exploring what changes in federal budget deficits would be necessary to reduce federal debt held by the public to various targets over the long term. This is important because despite nine years of economic growth, federal debt held by the public already sits at 78 percent of GDP and is increasing. Under current law and all reasonably likely scenarios—where last year’s tax cuts are extended, Social Security isn’t cut, etc—the debt will balloon, potentially reaching 200 percent of GDP by 2048. CBO doesn’t have a crystal ball. But all signs point to public debt at the very least reaching uncharted territory of surpassing 100 percent of GDP unless Washington starts doing something different.
What Would It Take To Turn The Tide?
The report gives a daunting assessment of just how different Washington must act to right the national fiscal ship. It explores three targets—public debt at 100 percent of Gross Domestic Product (GDP), 78 percent (the level we have right now), and 41 percent (the average annual level over the last 50 years)—and reports on what it would take to reach these levels over 15, 20, 25, or 30 years. It’s real bad. Even taking 30 years to reach “only” 100 percent public debt to GDP would require reducing deficits by $270 billion next year. And that level of reduction, 1.3 percent of GDP, would need to happen every year…for 29 more years. Just to maintain current levels of debt requires $400 billion in deficit reduction next year. Historic level of 41 percent? Reduce the deficit by $630 billion, or roughly half the entire discretionary budget. And do it again. And again. And again. Yeah.
While daunting, a 20 or 30-year time frame does allow for progress. CBO might be underestimating economic growth. Maybe some sort of positive shock will make their estimates too conservative. But they could just as easily be too optimistic. Negative shocks and their effect on the trajectory of revenue and spending, like the dot com bust, 9-11, and the 2008 great recession, can’t be predicted either. Overall CBO does a decent, though not perfect, job of approximating what will happen. With this in minds lawmakers should be more conservative in their approach. But they are doing the exact opposite.
Washington seems to have lost all notion of fiscal restraint with the abandonment of spending caps in the March 2018 budget deal. Most lawmakers never really embraced spending restraints encapsulated in the Budget Control Act of 2011. Congress refused to do its job so it punted to a super committee to come up with $1 trillion in deficit reduction, through spending cuts or increases revenue, over 10 years. This failed, so across-the-board cuts and annual spending caps were put in place to achieve savings. Lawmakers have chafed ever since, deploying machinations to change the game. This spring, they just gave up the charade, increasing discretionary spending by more than $300 billion without bothering to come up with even a fake pay-for.
Stop Ignoring The Full Picture
Congress ignores an entire side of the ledger – revenue. There are three ways to reduce deficits: cut spending, increase income, or use a combination of both. Ignoring decades of experience and dozens of estimates pointing out that tax cuts don’t pay for themselves, Congress enacted a tax cut currently projected to reduce revenues by least $1 trillion. The tax cut is likely contributing to a burst of economic activity, but again, that doesn’t look sustainable.
Economists also agree the tax cuts’ positive effect is being offset by another administrative action: tariffs, with which the Trump Administration has decided to make 1930s economics great again by reviving protectionism and the use of archaic tools of economic self-harm to pick winners and losers in the economy. Nearly everybody agrees that American trade is a good thing and that we should strive for improved trade deals. But few believe tariffs are the way to get there. Mere weeks into the introduction of tariffs, American manufacturers now face a 25 percent import tax (that’s what a tariff is) on $50 billion worth of 1,096 products coming from China, and 10 or 25 percent tax on 187 types of aluminum and steel products from other nations. An additional $200 billion of goods and materials imported from China are set to be hit with increased tariffs as early as September. This has led to predictions of net job losses, reduced economic growth, and an increase in another Washington trick: off-budget, emergency spending.
When all else fails, lawmakers are turning to off-budget accounts and abandoning their critical oversight function. Despite spending nearly $20 billion a year on subsidized crop insurance and other agricultural income entitlement programs, the administration is set to spend an additional $12 billion on farm businesses experiencing economic disruption from tariffs. Even after abandoning budget caps Congress adopted emergency supplemental spending bills to send even more cash to cover the costs of last year’s hurricanes and wildfires. Even before the BCA spending caps were abandoned, the appetite for defense spending resulted in piles of cash in the off-budget Overseas Contingency Operations slush fund account. And administration officials are pushing for billions of dollars on a border wall without demonstrating how this version will learn from the decades of mismanagement we’ve documented in a recent policy brief on border security profiteering.
CBO doesn’t stand for the Cassandra Budget Office, policymakers need to heed the prophecy and right the nation’s fiscal ship. The stakes are high.