The National Debt And The Imminent Fiscal Crisis

Sep 16th, 2023 | By | Category: Featured Issues, Politics & Current Events

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As columnist George Will so eloquently puts it: “This nation is slouching into the most predictable fiscal crisis in its history.”  On 1 August 2023, Fitch Ratings lowered the credit rating of the United States one notch to AA+ from a perfect AAA.  The firm, citing a “deterioration in governance” along with America’s mounting debt load, suggested that “it could be a long time before that decision [i]s reversed.”  This credit rating change is similar to the drop to AA+ in 2011 by S&P Global, which has kept its rating there.  There is a profound lack of willingness to compromise and reasonably discuss the national debt on the part of both political parties.  This increased polarization was central to the Fitch decision.  Indeed, Richard Francis, head of the Americas sovereign group at Fitch, argued that “There is no willingness on any side to really tackle the underlying challenges.”  This intense partisanship has inhibited decisions on better budgeting and the debt ceiling, “with both Democrats and Republicans unmovable on policies that could improve the country’s fiscal position” (e.g., taxes, Social Security and Medicare).

Why is this so important?  As Jon Rennison and Alan Rappeport of the New York Times summarize, “The US Treasury market is the largest sovereign debt market in the world, underpinning borrowing costs across the globe, with Treasuries owned by investors of all stripes.  The US rating remains among the highest in the world, backed by a strong and diverse economy and aided by the central global role of the country’s currency.”  But, the Federal Reserve’s rapid interest rate increases have compounded the situation by raising borrowing costs, forcing the government to borrow even more money to account for higher interest and other payments to bondholders.  More borrowing means more debt for investors to digest.

Why has the debt issue become more alarming?  The Wall Street Journal reports that both the US fiscal and political outlook have deteriorated since the previous debt downgrade by Standard and Poor’s in 2011:  “The ratio of US debt held by the public to GDP at the time was only 65.5%, while the Congressional Budget Office expects it to be 98.2% this year.  That’s up 79.4% before the pandemic and it is expected to rise to 115% of GDP by 2033 on present budget trend.  As Fitch notes, US ‘general government debt,’ including state and local government, is more than two-and-a-half times greater than the median 39.9% of GDP for an AAA rating.”  The future looks much worse:  “Interest on the debt this year is expected to be $633 billion, which is $188 billion more than all corporate tax revenue.”  Over the next decade, the CBO projects that annual federal budget deficits will average around $2 trillion per year, adding to the $33 trillion the government already owes to investors.  Indeed, by 2029, the US is on pace to spend more each year on interest on the national debt than on national defense.  Politically, President Biden and his progressive allies want to create new entitlements that would cost trillions of dollars, while Trump attacks any Republican who even mentions reform.  “As Piper Sandler’s Andy Laperriere notes, the Trump GOP is moving away from its traditional pro-growth, free-market beliefs to favor protectionism and anti-business policies . . . Without faster growth or policy reform, the US fiscal outlook will worsen.”  To demonstrate that this crisis is not energized and exacerbated by the Democratic Party alone, presidential candidate Nicki Haley argued in the August presidential debate that “Donald Trump added $8 trillion to our debt. [And] you look at the 2024 budget: Republicans asked for $7.4 billion in earmarks. Democrats asked for $2.8 billion. So tell me who are the big spenders?”  A recent Roll Call story also demonstrated that “House Republicans have so thoroughly stacked the earmarking deck in their favor in appropriations bills for the upcoming fiscal year than the top Democratic recipient doesn’t even appear in the top 60.”

Historically, the US government has borrowed during times of national crisis such as wars, or pandemics as a way of mobilizing national resources.  But now the US borrows heavily during periods of economic growth to “meet basic and ongoing obligations.”  This is increasingly unsustainable.  For 2023, the economy is growing, the COVID crisis is over and there are no domestic emergencies.  But revenues have fallen about 10%, despite the increase in corporate taxes.  The Wall Street Journal also reports that “individual income-tax revenue is down 20%, or about $442 billion.  Furthermore, outlays are up 11% so far this year, or $473 billion, and they would have been higher at $536 billion without the shift in payments timing.  Spending lowlights include $71 billion for Mr. Biden’s latest student loan non-repayment plan; $111 billion more for Social Security, largely for the cost-of-living adjustments for inflation; and $104 billion for Medicare from higher payment rates and more care . . . The biggest increase in outlays so far this year has been net interest on the soaring federal debt: a rise of $146 billion to $572 billion, or 34%.”

With his usual wit, George Will writes that “There is no mystery about what the crisis is; there is clarity about what broadly must be done. There is, however, fatalism about the political system’s inability to do it. The fatalism is refutable, but with a mechanism that should make constitutionalists queasy: Should we protect the nation’s fiscal future by further diminishing Congress, which would exacerbate the braided problems of a rampant executive and an unaccountable administrative state?  Demography is destiny for today’s entitlement state, which functions primarily to transfer wealth to the elderly. America’s population is aging, life expectancy is increasing, a quarter of Medicare spending is on services in the last year of life, and 40 percent of that 25 percent on the last 30 days. Furthermore, the U.S. birthrate is declining, and immigration will not be liberalized nearly enough to adequately replenish the long-term workforce that must fund entitlements.  Without politically excruciating changes, the two principal drivers of federal deficits—Social Security and, especially, Medicare—will produce ever-higher government spending and ever-larger deficits.   Absent entitlement reforms, interest rates will rise, reducing private investments and economic growth, and federal revenue.”

The solution to this crisis is not rocket science.  Two simple facts obtain:  There must be increased revenue and there must be reduced spending.  But to accomplish both there must be a willingness within both political parties to compromise.  Republicans must accept the fact that taxes will need to go up.  Democrats must recognize that changes to Social Security and Medicare are necessary; both are major drivers of federal spending.  Without the willingness to compromise, the future for the US is fiscally unsustainable.

See Joe Rennison and Alan Rappeport in the New York Times (3 August 2023); Wall Street Journal editorial (3 August, 9 August and 24 August 2023); New York Times editorial (9 July 2023); George F. Will “A fiscal crisis awaits. Here’s a provocative idea for heading it off” in the Washington Post (4 August 2023).

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