The United States will soon break a record that has stood for 78 years. But this record, as it concerns the federal debt, is no cause for celebration. According to the latest projections from the nonpartisan Congressional Budget Office, if current trends continue, the debt will reach 106.2% of annual economic output in 2027. This would surpass the all-time high of 106.1% of GDP in 1946, when the United States was demobilizing from World War II and had not yet begun paying off the massive borrowing required for its global military operations.
Nearly every part of this latest CBO report is alarming. Most disturbing is how much the debt situation has worsened since the CBO's last estimate in February. The deficit for fiscal year 2024, which ends September 30, is projected to be $1.9 trillion, up 27% from the last CBO forecast. That's double pre-pandemic levels, even though the country is not at war and is no longer in a health crisis. And the debt is growing rapidly, even though economic growth has unexpectedly been strong, which would normally help reduce the deficit.
Democrats and Republicans alike know the country is in a difficult budget quagmire and just keep digging. They have done it again in the past few months, which is part of why the CBO projections have gotten worse. Some new spending was justified, such as the aid bill for Ukraine and Israel. But much was not. President Biden pushed through more costly student loan forgiveness, which while benefiting a select few Americans, has done nothing to make college more affordable. Republicans in Congress demanded immediate defunding of the IRS, a reckless move that the CBO projects will hinder the IRS's ability to pursue tax evaders and reduce revenues. These policies are especially reckless at a time of high interest rates. Interest payments this fiscal year will exceed defense spending.
The CBO projects that federal debt will reach 122% of economic output in ten years' time, a figure that would have been unthinkable in the not-too-distant past. Over the next decade, spending will soar while revenues remain flat. Republicans see this data as evidence that the US only has a “spending problem,” but this is only half true. To be sure, future deficits are caused by mandatory spending on Social Security and Medicare and rising interest costs. But if memory serves, Republicans are now rejecting entitlement reform. The rest of the budget, discretionary spending including defense, is actually declining as a percentage of GDP.
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It actually wouldn't be that painful if leaders of both parties were interested in steering the country in a more sustainable direction. Here's the totally infuriating part. Social Security, for example, can be largely solved by raising the amount of wages on which the government imposes the Social Security payroll tax. Currently, the Social Security payroll tax is capped at $168,600 per year. That would go a long way to strengthening the system, with minimal sacrifice and without cutting benefits. We laid out a complete plan last year. The choice is between making modest changes now or facing cuts in Social Security benefits in about a decade.
Perhaps because both parties are complicit, the debt issue has barely been discussed in the presidential election. Instead, the two leading candidates are promising things that could make the debt problem worse. Former President Donald Trump is touting tax cuts. President Biden is pushing spending increases and possible tax hikes that would not realistically offset the debt. Both candidates increased the debt substantially during their terms in office, mainly due to pandemic response costs. But while Trump's tax cuts reduced revenues by nearly $2 trillion over a decade, Biden is increasing spending on infrastructure, industrial policy and student loan relief.
Trump's personal tax cuts expire next year. There will be pressure on whoever is in Congress or the White House to extend them, but that would cost trillions of dollars. And remember, that's based on an optimistic assumption that the tax cuts won't be extended, despite the CBO's pessimistic projections. Ideally, Biden and Trump will be asked about the debt during the CNN presidential debate. I don't expect a real answer. But I do expect that whoever the ultimate winner is will have to address this issue.
