As we approach June 1, when Treasury Secretary Janet Yellen complaints that the federal government will default on the federal debt if the debt ceiling is not raised, there is a lot of talk about the debt, and there should be. Republican House Speaker Kevin McCarthy managed to muster enough votes in the House of Representatives to pass a bill that would allow for an increase in the federal debt limit and bring discretionary spending back to 2022 levels, then would allow them to increase by 1% per year for the next ten years. What this means, since inflation is likely to exceed 1% on average, is that discretionary spending would slowly decline in real terms. So far, President Biden has refused to negotiate any cuts in the growth rate of discretionary spending. But even if he agrees with President McCarthy, the slower growth in discretionary spending will only be a small down payment on a huge and growing problem: the massive and growing federal debt.
If the federal debt continues to grow at the rate predicted by the Congressional Budget Office, then to avoid a default in the 2030s, Congress will need to pass a package of spending cuts and tax increases. On the tax side, however, Congress is constrained by one of the few constants we’ve ever seen in macroeconomics: the size of federal tax revenue as a percentage of gross domestic product. If this constant holds in the future, the only choices would be deep spending cuts or a default on the federal debt.
These are the first paragraphs of David R. Henderson, “Collapse on debt», Defining ideas, May 17, 2023.
But the big deal is projected spending, deficits, and debt beyond 2033. In its Table 4, the CBO predicts that from 2034 to 2043, federal spending will average 26.3% of GDP and, from 2044 to 2053, 29.0% of GDP. . Deficits are projected to average 8.0% of GDP from 2034 to 2043 and 10.2% of GDP from 2044 to 2053. By 2043, the CBO predicts, federal debt held by the public will be 152% of GDP and, by 2053, 195 percent.
Budget cuts would work:
The bad news is that there appears to be no appetite among congressional Democrats and only a slight appetite among congressional Republicans for deep spending growth cuts. The good news is that if they ever decide to take spending cuts seriously, they could see a major example in the United States after World War II and more recent experiences in Canada and the United States where spending has taken a back seat. either plummeted in real terms (post-WWII US) or spending as a percentage of GDP dropped dramatically (Canada and US) with seemingly few negative effects and some major positive effects.
In response to economists Lawrence Summers and Jason Furman, who have downplayed the danger of large budget deficits, I wrote two articles on this site:Who’s Afraid of Budget Deficits? I am», February 20, 2019, and «Furman, Summers and taxesMay 1, 2019. I wonder what they think now about federal budget deficits and debt. Of course, they could argue that no one expected the influx of federal spending that accompanied COVID-19 and the lockdowns under Presidents Trump and Biden. But it suggests yet another reason not to be so quiet about deficits and debt: we need to keep our powder dry. I guess Summers and Furman are at least a little more worried than they were.
Read it the totality.