America Is Ignoring Its Bulging Budget

By Brian Riedl

Tuesday, March 07, 2023

 

The Congressional Budget Office released its first new federal-budget projections in nearly a year last month. If you missed it, you are not alone. Even as the CBO showed budget deficits soaring toward unsustainable levels, most of the print media offered respectful placement as a one-day story and then moved on. Cable news barely covered this confirmation of Washington’s rapidly deteriorating fiscal picture. The White House offered no press release promising to address the sea of red ink, nor did Republican or Democratic congressional leaders.

 

The indifference was not always this deep. During the Bush administration, budget deficits rising past $300 billion generated days of headlines, television coverage, and political debate. Even during the Trump administration, the regular uptick of annual budget deficits toward the $1 trillion threshold kept my phone ringing with reporter calls. Now, the CBO’s revelation of deficit projections approaching an unfathomable $3 trillion within a decade brought little sustained coverage.

 

Yet Washington’s fiscal path demands attention. Over the next decade — even under the CBO’s rosy scenario of expiring tax cuts, no new spending expansions, and low interest rates — the national debt held by the public will leap from $25 trillion to $46 trillion. Annual budget deficits, which have never exceeded $1.5 trillion outside the recent pandemic, will approach $3 trillion within a decade.

 

The cost of annual interest on this debt will leap from $350 billion two years ago, to $1.4 trillion a decade from now. At that point, 20 cents of every tax dollar will go toward paying interest on the debt — exceeding the cost of defense, Medicaid, and every program except for Social Security and Medicare. Even with the CBO assuming that the interest rate paid by Washington does not exceed 3.2 percent, interest costs will swell to a record 3.6 percent of GDP.

 

Tax revenues are not the problem. Since 2019, inflation-adjusted tax revenues have leaped by $1 trillion. Last year, individual income-tax revenues exceeded 10 percent of GDP for the first time ever, and the total tax revenues of 19.6 percent of GDP had been exceeded only in 1944, 1945, and 2000. The 18 percent of GDP in tax revenues projected to be collected over the next decade would exceed every decade in American history except for the 1990s (although extending the 2017 tax cuts would reduce revenues to more typical levels).

 

But even this tax revenue boom cannot keep pace with escalating spending, which is now headed past 25 percent of GDP. Such stratospheric levels have been previously reached only during the temporary emergencies of World War II and the recent pandemic. Now, this spending figure represents the baseline of normal government operations. Within a decade, the federal budget will swell to nearly $10 trillion.

 

Mandatory spending entirely drives the deficits. As stated earlier, tax revenues are soaring. Defense and other discretionary spending levels are projected by the CBO to resume their long-term decline as a share of the economy. Yet Social Security and Medicare costs are expected to grow at a combined rate of nearly 7 percent annually, and Medicaid continues to grow quickly as well.

 

The best measure of Social Security and Medicare’s fiscal burden is the amount of general revenues they cost the Treasury each year because payroll taxes and Medicare premiums are insufficient to pay promised benefits. (Yes, in contrast to popular myth, Social Security and Medicare can and do run large deficits.) These annual shortfalls will nearly quintuple from $426 billion last year to $2 trillion a decade from now. They are the overwhelming driver of deepening red ink.

 

The CBO figures assume that Congress will continue deficit-financing Social Security and Medicare after their trust funds reach insolvency within the next decade. CBO also projects the highway trust fund to become insolvent within five years. However, if Congress does not act, each of these systems will automatically reduce spending at their trust-fund exhaustion date. Social Security benefits, for example, will immediately fall by 20 percent.

 

This budget outlook has rapidly worsened under President Biden. The president likes to take credit for “deficit reduction,” yet his policies have directly added $5 trillion to ten-year deficits, and the overall 2021-2031 deficit projection has worsened by $6 trillion since his inauguration. There was a $1.9 trillion American Rescue Plan, an infrastructure expansion, a student-loan payment moratorium and bailout (currently under Supreme Court review), a 23 percent surge of discretionary spending over two years, and large expansions of spending on SNAP benefits, domestic semiconductor production, health subsidies, and veterans’ benefits. Now the costs are coming.

 

And yet, not even the worst fiscal outlook in memory has shaken Washington out of its complacency. President Biden continues to propose new spending, and his forthcoming budget proposal looks to match last year’s gimmick-laden document that claimed deficit reduction by simply not counting $2 trillion in new spending proposals.

 

Congressional Republicans are discussing deficit reduction and making waves on the debt limit, but it is unclear if their aggressive promises to shave trillions in federal spending will be backed up with real proposals and reforms. With both President Biden and President Trump demagoguing any attempt to address Social Security and Medicare, Congressional Republicans already seem to be backing off attempts to address those overwhelming debt drivers.

 

Back in 1983, the budget deficit spiked to a post-war high of 5.9 percent of GDP. This motivated presidents and Congresses to enact deficit-reduction deals in 1983, 1985, 1987, 1990, 1993, and 1997 — culminating in a balanced budget by 1998. In the two decades following the 2002 reappearance of budget deficits, there has been just one notable deficit-reduction deal. And that 2011 Budget Control Act eventually saw many of its promised savings repealed. Now, the deficit again sits near the 1983 level — with entitlement costs set to drive deficits past 7 percent of GDP within a decade, and 11 percent of GDP within three decades — and Republicans and Democrats refuse to even sit down and try to negotiate a plan to avert this path toward a debt crisis.

 

Partisan political operatives encourage politicians to ignore the escalating deficit, pledge not to touch Social Security and Medicare (as well as middle-class taxes), and to pummel any political opponent who dares question the borrowing bonanza. That approach may represent savvy short-term politics. But the problem is not going away, and cynical talking points will not cancel the laws of math and economics. Over the next three decades, politicians are promising federal spending more than $100 trillion above what families and businesses will pay in taxes, and the bond market is unlikely to lend Washington enough money to close that gap at sustainable interest rates. The only decision is whether to address these fiscal trends now, or wait until the economy forces even deeper reforms.