Washington should make a pledge: No new debt for the rest of 2022
The United States borrowed $13 trillion over the past decade – including over $5 trillion in efforts to fight COVID over the past three years and the remaining $8 trillion because lawmakers preferred not to pay for their policies.
While there are times the nation needs to borrow for economic reasons — COVID and the Great Recession are perfect examples — now is most certainly not one of them. With inflation reaching a 40-year high this year, additional borrowing makes the Federal Reserve’s job of fighting inflation all the more difficult and is the opposite of what is needed.
We have reached the point that lawmakers rarely even attempt to pay for their priorities. (Sen. Joe Manchin (D-W.Va.), in his heroic effort to change the Build Back Better legislation from a budget-busting bill into the deficit-reducing Inflation Reduction Act, is the leading exception.) But most often we hear nonsense like tax cuts pay for themselves, or certain priorities are so important they should not be paid for, or we should just print more money, or in the case of the president, we don’t hear much justification — he just makes abrupt changes by executive order.
We are going to have to make a change.
The best thing Congress can do to ease inflation and reduce recession risk is to enact a deficit reduction package designed to help stabilize the economy. It would require savings of roughly $7 trillion over a decade to stabilize the debt-to-GDP ratio where it is now, over $13 trillion to bring it down to 80 percent, and about $15 trillion to balance the budget — a goal that is sadly no longer reasonable this decade given how large the problem has become. Normally one would want to phase the changes in quite gradually, but in the face of inflation, some large upfront savings would be desirable. We have developed one possible outline with the Committee for a Responsible Federal Budget’s Fiscal Blueprint.
Instead, lawmakers seem poised to actually make the deficit worse.
Not only is there discussion of boosting defense and nondefense appropriations well above inflation, but there’s talk of adding on all sorts of new tax breaks and spending increases.
Some of this talk is around emergency appropriations for Ukraine, COVID and disaster relief — more defensible emergency borrowing, though given how much we borrow for non-emergencies, we should consider paying for it. But lawmakers are also talking about including a number of tax cuts and spending increases unrelated to current needs as well.
Some Republicans want to cancel policies that they themselves enacted under the Tax Cuts and Jobs Act of 2017 and deliver these new tax cuts with no pay-fors, such as unraveling a tightened limit on net interest deductions, delaying the amortization of research and experimentation costs over several years, and canceling the phasedown of 100 percent bonus depreciation.
Rather than demand these business tax cuts be paid for, some Democrats are apparently demanding they be coupled with further tax cuts — likely in the form of an expanded child tax credit. That’s the kind of cynical fiscal trade we have seen way too much of in recent years. Don’t be fooled by those who double down on borrowing and then declare it a bipartisan win.
Both parties are also pushing to prevent long-scheduled Medicare cuts and provide a boost to a variety of Medicare payments to hospitals and providers, continue certain ‘tax extenders,’ provide new subsidies for retirement savings, and even let some state and local government retirees double dip into Social Security.
And lawmakers will also almost surely cancel a sequestration scheduled to enforce pay-as-you-go (PAYGO) rules. In light of past borrowing, the rules call for a 4 percent cut to Medicare and the elimination of a small set of additional programs, such as certain farm subsidies.
We’ve done the math — enacting just the appropriations and tax and health extensions would cost about $240 billion in the first year and $1.9 trillion if made permanent over 10 years. Adding in the theoretical cost of repealing the PAYGO sequester and the other policies under discussion, costs could rise to as high as $585 billion in the first year and $5 trillion over a decade.
That’s enough new borrowing to boost the inflation rate by 50 to 150 basis points — which could very well be the difference between a bumpy landing and a recession. Such an end-of-year borrowing binge could do real damage to the economy.
While lawmakers may not be courageous enough to do the needed work of enacting a deficit reduction plan, they at least should start with baby steps and commit to no new borrowing for the rest of the year. It’s only five weeks, but abstaining from the borrowing spree some are contemplating would be important both for the economy and as practice for the real work ahead.
Maya MacGuineas is president of the nonpartisan Committee for a Responsible Federal Budget.