Amid all the noisy Washington headlines, there's one piece of news that gets very little attention: The U.S. is on a fiscal downward trajectory. That's the clear message from the Congressional Budget Office's (CBO) recently updated long-term projections. If Congress doesn't change direction, the tally is going to be bleak.
As the CBO details it, deficit spending is more rampant than ever. Both parties share responsibility, as do both ends of Pennsylvania Avenue. And everyone should remember that investors' appetite for U.S. debt is not unlimited.
The federal government currently spends about $7 trillion and collects only $5 trillion in taxes annually. The resulting deficit is just over 6% of gross domestic product, an alarmingly high number for an economy that is nearing full employment.
The CBO expects public borrowing to remain at this elevated level or even higher for decades. Assuming there are no recessions, public debt will rise to 100% of GDP this year and 118% of GDP by 2035 – and from then on it will continue to rise.
A responsible Congress would make deficit reduction a top priority. Instead, Republicans are discussing ways to borrow more — and not just a little more. New tax cuts are being considered. And many want to extend the provisions of the Tax Cuts and Jobs Act of 2017, which would otherwise expire at the end of this year.
A full extension of the law would increase the national debt by about $5 trillion over the next decade and by $40 trillion over a 30-year horizon. The debt ratio in 30 years would skyrocket to more than 200% of GDP.
Higher tariff revenues are not going to bring – or even come close to – a balancing of the budget. In fact, the impact on total revenue is likely to be negative, as tariffs squeeze trade activity and job creation.
The savings from reducing the federal payroll will also not have a noticeable effect. Despite all the attention paid by the media to cuts in staff and programs – and some of them are justified – they have almost no impact on containing the budget deficit.
As if that were not enough, mass layoffs and program cuts are being made without taking into account the provision of public services on which voters depend. When they see that public parks are closing, health care is reduced, and deaths from infectious diseases become more common, they will be angry.
Republicans may pay a heavy price in next year's midterm elections, but regardless: The current approach to governance is not sustainable in the long run. At some point, long before the debt reaches stratospheric heights, financial markets – if not voters – will say "so far". Bond prices will collapse, long-term interest rates will skyrocket, and the government will default – either explicitly or under the cloak of soaring inflation.
Restoring fiscal control should be at the top of the agenda of this Congress. The only sensible approach is to combine moderate tax increases and prudent spending cuts. Burden-sharing will allow changes to be easier and more gradual if undertaken soon.
Some elements of the Tax Cuts and Employment Act are worth retaining: The largest formal income tax deduction and stronger investment incentives, for example, are growth-friendly measures. However, all these extensions, as well as any other new measures, will have to be combined with lower spending and higher taxes overall, in order to achieve a substantial net reduction of projected deficits.
Congress is already too late, but the cost of further delay – and even worse, exacerbating the problem with additional deficit spending – will have devastating economic consequences.
In Washington, the biggest scandals are often hidden in plain sight. If Congress and the government don't get serious about reducing the deficit, Americans will soon see costs pile up around them.
Rendering – Editing: Lydia Roubopoulou
