One of the few things Democrats and Republicans appear to agree on is that fiscal responsibility is for losers. As a result, the country’s looming financial breakdown gets barely a mention as this year’s elections approach. This month’s bracing projections on the deficit from the Congressional Budget Office (CBO), for instance, passed almost unnoticed. How long this studied inattention can be sustained or what it will take to get Washington even talking about solutions is anybody’s guess. Meantime, the odds of an outright fiscal crisis within the next few years are rising steadily.
The CBO now expects a deficit of $1.6 trillion, or 5.6% of gross domestic product, for the current fiscal year. That’s for an economy at full employment and growing pretty well. Under current law, the gap between spending and taxes keeps widening over the next decade, rising to $2.6 trillion, or 6.2% of GDP, by 2034. Despite steady economic growth, debt will rise from 97% of GDP this year to 116%. From there, it just keeps going up.
Believe it or not, this is a rosy scenario in at least two ways. First, the outlook includes no recession. The pandemic crushed output and demanded strong fiscal stimulus — a combination that added 20 percentage points to the debt ratio in a single year. The next economic setback is a matter of when, not if. Even a much milder reversal than that of 2020 would push the numbers forcefully in the wrong direction.
Second, the CBO’s “current law” forecast includes an unlikely degree of scheduled tightening. The projection assumes that caps on discretionary spending introduced last year will be maintained and that the Trump administration’s 2017 tax cuts will expire in 2025 as the law promised. A more plausible “current policy” forecast might let public spending grow in line with the economy (as it usually does) and assume that tax rates won’t rise automatically (as they usually don’t). In that scenario, debt climbs to more than 130% of GDP by 2034 and keeps climbing more steeply thereafter, again assuming uninterrupted economic growth.
Didn’t Congress pass the Fiscal Responsibility Act last year — proving, in fact, that it recognizes the problem and is willing to do something about it? Well, the FRA did help, a bit. The aforementioned spending caps and other tweaks (if maintained) lower the deficit by about $150 billion a year. In other words, without the FRA, the ten-year deficit would not be roughly $19 trillion, as the CBO projects, but a little more than $20 trillion. The measure failed to restore any semblance of balance. If Washington can’t summon a lot more fiscal responsibility than this, the economy really is in trouble.