Post-pandemic recovery cannot ignore ballooning debt
In presenting his case to Congress for an ambitious policy agenda, President Biden said, “It is not enough to restore where we were prior to the pandemic.” That thinking makes sense, but it should also be applied to the ballooning national debt.
Prior to the pandemic, the debt was on an unsustainable path. Leaving the debt on an unsustainable path is not an acceptable goal for a post-pandemic recovery plan. Instead, the president and Congress should aim to improve the pre-pandemic fiscal outlook. That means doing more than just paying for new initiatives.
Consider where the debt was headed prior to the pandemic. In January of 2020, the Congressional Budget Office (CBO) projected budget deficits exceeding $1 trillion every year into the future. Measured as a share of the economy, the debt was at its highest level since the end of World War II and was projected to more than double over 30 years. That basic scenario has not changed. The CBO now projects that under current law, the annual budget deficit would reach $1.9 trillion within 10 years and the debt would shoot up from 102 percent of the economy this year to 202 percent within 30 years.
Such high levels of debt would have serious negative consequences over the long term. It would reduce national savings and investment, restrain economic growth, increase interest costs and limit the nation’s ability to respond to new and unforeseen challenges.
The problem is rooted in a pre-existing structural mismatch between projected revenues and spending on major benefit programs such as Social Security, Medicare and Medicaid, which run on autopilot and are driven by increased numbers of beneficiaries and rising health care costs. According to CBO’s long-term projections, spending on Social Security and the major health care programs will grow from 10.8 percent of the gross domestic product in 2019 (pre-pandemic) to 17.2 percent in 2051 under current law.
Revenues are projected to grow as well but not nearly enough to keep pace. Moreover, the concentration of automatic spending increases for Social Security and health care programs will make it increasingly difficult to fund national defense and non-defense appropriations without driving the debt up further.
As deficits mount, so too will interest costs on the debt even if interest rates on government debt remain well below historic norms. The constant accumulation of massive new debt on an annual basis would eventually overwhelm the effect of low interest rates. In CBO’s projections, interest costs would surpass spending for Social Security by 2045 and reach a staggering 8.6 percent of GDP in 2051, amounting to nearly half of all projected revenues in that year.
The magnitude of the problem is illustrated by a pre-pandemic CBO estimate of what it would take to stabilize debt as a share of GDP over the next 30 years. To simply maintain the same high level of debt in 2050 as we have now would require a cut in spending, an increase in revenue, or some combination of those, totaling 2.9 percent of GDP every year beginning in 2025. That would mean finding $730 billion in savings in the first year alone.
Changes of that magnitude, enacted in one “grand bargain,” are not plausible in today’s political environment. There are, however, positive incremental steps that could be taken.
We could begin, for example, by passing the Trust Act, which has been put forward by a group of bipartisan co-sponsors in the House and Senate. It would establish a process for avoiding depletion of the major federal trust funds that are projected to become insolvent within 15 years. These include trust funds for the Medicare hospital insurance, Social Security Old Age and Survivor insurance, Social Security Disability insurance and highways.
The Trust Act would establish “Rescue Committees” for each qualifying trust fund with 12 members; six members from each party. All would have bipartisan co-chairs and would be charged with developing legislative language to carry out their recommendations. A majority vote of each committee would be needed for passage, with at least two members of each party being part of that majority. Critically, the work of the Rescue Committees would be rewarded with expedited consideration in the House and Senate.
This approach makes sense. Rather than trying to tackle the whole problem all at once, the Trust Act would focus on the most pressing and identifiable deadlines and in solving those smaller problems, which are very real, it would help solve the overall problem.
It is not a panacea, but it is far superior to the popular “Do Nothing” plan.
If we truly want to build an economy that does better than restoring where we were prior to the pandemic, putting the debt on a sustainable path must be part of the solution. We’re already in uncharted territory and there are a lot of downside risks. Higher interest rates on the debt, failure to carry out scheduled health care savings, or the enactment of new deficit-financed initiatives could easily dig the hole deeper.
We’ve heard a lot recently about the need to go big. That’s fine, but let’s remember that the debt has already gone big. Ignoring the debt challenge will not make it go away. It will just hand off all the hard choices to our kids and grandkids. They deserve better.
Robert L. Bixby is executive director of The Concord Coalition.
The Hill has removed its comment section, as there are many other forums for readers to participate in the conversation. We invite you to join the discussion on Facebook and Twitter.