11/16/2023 | News release | Distributed by Public on 11/16/2023 11:42
This essay was originally published by the Peter G. Peterson Foundation.
The outsized U.S. national debt is now $33.6 trillion, and the excessive deficits have reached new highs at $1.7 trillion for the fiscal year - 5.8% of GDP. The cost of servicing this debt due to inflation and rising interest rates is also increasing by $162 billion, reaching $879 billion in FY 2023, approximately the size of the defense budget. The rise in the cost of servicing the debt is the significant challenge, often warned about in the past but now here to stay for at least some time, threatening to crowd out federal spending priorities.
The congressional debate this year over FY2024 spending levels has contributed to an historic collapse of governance in the U.S. Congress, a broken budget process, the brink of a national default, a looming government shutdown, and the potential downgrading of the U.S. credit rating. U.S. global leadership and national security are at risk.
The Debt Crisis is here - not down the road. As a nation, we must act now. An important step - establish a Bipartisan Congressional Committee on Fiscal Responsibility.
While commissions are not silver bullets, there are several main benefits that a bipartisan commission can bring to help address our national debt challenge.
Business supports its establishment. The Committee for Economic Development, the public policy center of The Conference Board (CED), polled CED Trustee CEOs and Board Directors between September 25 and September 28, 2023. 87% of respondents believe a bipartisan congressional commission on fiscal responsibility could help reduce the national debt. Business leaders are major stakeholders in the U.S. economy, and their support is critical to the success of a commission.
The budget process is broken and Congress knows it. Since FY 1977, Congress has passed all of its appropriations bills on time only four times. The last time the House and Senate passed all 12 spending bills that the president signed into law before funding expired was in 1997 - nearly 30 years ago. Since 2007, there have only been two times that the omnibus bill that bundles all appropriations in a single, giant bill has not been used. Support for a commission is growing in Congress, as a solution.
The federal budget is a bipartisan issue. The national debt crisis must be solved by sustainable, bipartisan-supported solutions.
Solutions need to be comprehensive, spanning mandatory and discretionary spending, and include a strategic objective. The FY2024 debate on FY2024 spending cuts is only addressing the funding provided in the 12 congressional appropriations bills, which cover approximately a quarter of the federal budget, the discretionary budget. And the budget objectives only target that small portion of the federal budget. Revenue is not being addressed. And most importantly, the largest portion of government expenditures, mandatory spending - about three-quarters of the federal budget - including programs such as Medicare and Social Security - is not currently on the table. As the nation approaches historic levels of debt to GDP, a strategic fiscal health goal needs to be set and policies developed to achieve that objective.
Opportunity to raise public awareness/support. Public hearings and media outreach can raise public awareness, provide trusted information, and build support for the solutions, especially as they affect Social Security and Medicare. According to a Pew Research January 2023 survey, 57% of the public say that reducing the budget deficit should be a top priority, up from 45% in 2022, with both Republicans and Democrats more likely now to say this should be a top priority.
The Commission should be structured to include:
Current members of Congress from both Houses with bipartisan representation committed to finding solutions. The dynamics in Washington have changed so profoundly; current members from both parties will understand the shared dynamics that they are operating under.
Strict timelines. Given the stakes both at home and abroad, the commission should be established immediately and its comprehensive, strategic plan should be released within three months to provide the roadmap for the FY2025 budget and for the debt ceiling, which must once again be addressed by January 2, 2025.
RECOMMENDED SPENDING AND REVENUE REFORMS
The Commission's strategic objective:
The three structural spending/revenue reforms to help achieve this objective address the biggest drivers of U.S. national debt: health care, social security, and tax revenue:
Strategic Objective - Reduce Debt-to-GDP Ratio to 70%: The debt-to-GDP ratio of 70% is a recognized stable level for advanced economies, which shows the burden of debt relative to the country's total economic output and therefore its ability to repay it.
As the following analysis demonstrates, it would require a substantial realignment of fiscal policy and a multidecade plan to return debt to 70% of GDP, a more stable cap than the ratio today and those projected in the future, but still significantly above the much lower levels before the 2008 financial crisis, which were closer to 40%.
While it can be easy to expand debt rapidly, especially during a crisis, a plan for debt reduction will likely need to be more deliberate, sustained, and gradual to avoid sudden and large losses of income that can create recessions.
Figure 1 shows The Conference Board's economic forecasting analysis of various scenarios of tax rate hikes and outlay cuts that can push debt-to-GDP to 70% (and lower) within 10, 20, and 30 years.
The 20-year pathway is recommended, which is the most feasible, nearer-term time frame to restore a debt-to-GDP ratio of 70%, with the least draconian fiscal hardship. The below chart illustrates the timing and policy tradeoffs inherent to meeting this goal. A combination of raising all taxes by 1.5% permanently, and a reduction in outlays of 8.2% (including spending cuts and interest cost reductions as a result of lower debt) would achieve the goal of debt-to-GDP to 70% in about 20 years.
THREE STRUCTURAL SPENDING/REVENUE REFORMS
To tackle this strategy, the most important role of the commission is to address the biggest drivers of deficits and the long-term debt: Medicare and Social Security. Both of these programs' costs are increasing due to the aging of the population. Medicare costs are rising as well due to higher medical costs. Also adding to the urgency is that both of these programs have pending deadlines for action with their Trust Funds becoming insolvent (Medicare in 2031 and Social Security in 2033).
The third challenge the Commission must address in tandem is revenue. Tax policy is also on the congressional policy docket for action. At the end of 2025, almost all of the individual, estate, and pass-through provisions of the Tax Cuts and Jobs Act (TCJA) will expire. This pending debate provides a policy opening for increasing revenues through tax reform.
In order to facilitate the very urgent timelines that the commission will be operating under, the roadmap provided by the Simpson Bowles Commission should serve as a foundational guidepost.
SAVE SOCIAL SECURITY
Over 66 million seniors today receive Social Security payments, and with our aging population, that number is growing. The Social Security Trust Fund is projected to reach insolvency by 2033. Without adjustments, benefits will need to be slashed across the board by 25% or revenues increased by 33%. Otherwise, large transfers from general funds will be required - impacting more severely the deficit and changing the fundamental nature of the program from an earned benefit.
Several alternative approaches to save Social Security, which the commission should consider, include:
Reforming Medicare is a necessary condition for regaining fiscal health.
For the next 15 years, more people will convert to Medicare in America than people being born. Spending for health care programs is expected to exceed all other categories of federal spending by 2030. Aging of the population accounts for one-third of that growth; two-thirds is additional cost growth in the programs themselves, demonstrating the urgency of significant cost reforms.
By 2052, according to CBO, federal spending on health care programs will rise to 10.2% of GDP, compared to 6.6% in 2022. Spending on Medicare is projected to account for more than four-fifths of the increase in spending on major health care programs over the next 30 years as a percentage of GDP.
Medicare's Hospital Insurance (HI) Trust fund is expected to end full payment of benefits in 2031. In the event of insolvency of the HI fund, mandatory spending cuts would occur beginning at 11%.
Approaches for a bipartisan commission to consider to Reform Medicare include:
REFORM TAX POLICY
As our debt-to-GDP model demonstrates, Congress will need to implement revenue increases. At the end of 2025, Congress will be determining whether the provisions of the Tax Cuts and Jobs Act (TCJA) will be extended. This upcoming congressional debate creates an important opportunity for a third structural reform: Tax Reform. Given the high-charged and hyper-polarized debate on taxes, increasing revenue through tax reform may be a more politically viable alternative than a divisive, deadlocked debate on maintaining the cuts versus raising taxes.
The nation has never, in years generally characterized by peace, experienced the debt explosion that we have had since 1981. The danger of this explosion has been sidestepped, obscured, or excused over the past several years due to low interest rates. But high debt levels, which are rapidly rising as a percentage of GDP, slow the growth of economic output and recovery, lowering living standards over a period of years. Public debt diverts investment dollars away from the private sector and toward U.S. Treasury bonds, which are used to finance existing obligations of the government, not new private-sector initiatives. A growing debt burden could undermine confidence in the U.S. dollar, challenging the U.S. global leadership role, and making it more costly to finance public and private activity in international markets.
The Debt Crisis is here. The time is now for a bipartisan Fiscal Responsibility Commission to develop viable comprehensive solutions.