Fiscal Policy Remains Unsustainable

Blog Post
Wednesday, July 05, 2017
A Series

25 Fiscal Lessons

Learned over the course of 25 years, paving the way toward a better economic future.

Read the Lessons

In 1994, less than two years after the founding of The Concord Coalition, President Bill Clinton appointed then-senators Bob Kerrey (D-NE) and Jack Danforth (R-MO) to lead the Bipartisan Commission on Entitlement and Tax Reform. The two senators -- now Concord co-chairs -- and their commission produced a report in which 30 of the 32 members agreed that “current trends are not sustainable.”

While much has changed in the past 25 years, this fundamental reality has not: Federal budget policy remains on an unsustainable track, driven by structural forces that increase federal spending faster than revenues.

It is true that for a while, things were headed in the right direction. Deficits steadily declined in the mid-1990s and budget surpluses emerged in 1998. However, this favorable trend ended in 2002 when a combination of tax cuts, military spending and a mild recession plunged the budget into deficits again.  

Policy decisions and a much deeper recession that began in 2008 led to even worse deficits. At the height of that recession in 2009, the federal government ran its first annual deficit greater than a trillion dollars.

As the economy recovered, spending designed to stabilize it wound down, tax revenues rose, and the deficit proceeded to fall. This year the government is projected to run a deficit of $559 billion. That is still quite substantial in dollar terms but at an estimated 2.9 percent of GDP, it is roughly in line with the average for the past 50 years.

This return to “normal” deficits might lead some to conclude that our fiscal policy problems are behind us. The reprieve, however, is temporary. Deficits are on the rise again and this time the outlook is even more challenging than it was 25 years ago. Nothing has been done to change the basic structural mismatch between spending commitments and federal revenues.

As a result, the national debt is growing faster than the economy. In 2002 the debt was less than one third of the gross domestic product (GDP). Today it stands at 77 percent of GDP -- the highest level since the end of World War II.

But the problem isn’t so much where the debt is today as where it is headed. Under current law, the debt is projected to reach an unprecedented 150 percent of GDP within 30 years. This could be made worse by things the projections don’t take into account, such as future military engagements, recessions, or other unexpected national emergencies that would require additional borrowing.

These projections are not mere statistics -- they will have real negative consequences for each and every American as the nation’s standard of living declines. Rising federal borrowing competes with the private sector for available capital, draining the savings needed to invest in the economy, slowing workers’ productivity, and hampering long-term growth.

Moreover, there is a direct budgetary cost to rising debt. The larger the national debt is, the larger interest payments will generally be. That is money that can’t be spent on services for the population, national security, investments in the nation’s future, or lower taxes -- it’s spent merely to cover past borrowing.

Over time, these forces can drag down the American economy and lower wages. The Congressional Budget Office (CBO) projects that an additional $2 trillion dollars of debt incurred over the next 10 years would reduce annual per-person income by about $2,000 (after adjusting for inflation) over 30 years.

In the long run, economic growth depends on fiscal stability. And yet the growing weight of federal borrowing will continue to pile up even as we invest less in growth-oriented ways that might help deal with that burden in the future.

To make fiscal policy sustainable, policymakers must adjust federal budgets to stabilize the national debt as a percentage of GDP and then put it on a downward trajectory. The status quo simply cannot continue in perpetuity.