Last week, the Government Accountability Office (GAO) issued “The Nation’s Fiscal Health,” an annual report that describes the fiscal condition of the United States. The report finds that America’s fiscal health is ailing. More pointedly, “absent policy changes, the federal government’s fiscal path is unsustainable.”
So, let’s take a look at three facts from the report that should prod our lawmakers into action.
Explosion in Debt Counters Historical and Global Norms
It’s not just the fact that the debt is exploding, it’s the conditions in which the explosion is taking place. The GAO report points out that “for most of the nation’s history the debt-to-GDP ratio tended to increase during wartime and decline during peacetime” and that recessions boost debt-to-GDP while recoveries decrease it.
But a decade into a peacetime recovery with historically low unemployment, the United States debt-to-GDP continues to grow as we run $1 trillion annual deficits over the next decade.
This projection assumes that there will be no recessions or large disasters, which would drive up debt even further.
Our current debt explosion is not just a historical anomaly, it also runs counter to contemporary norms. Last year, the International Monetary Fund (IMF) found that debt-to-GDP ratios in advanced economies have been falling since 2012 and that this trend would continue over the next 5 years. But not in the U.S., where our debt-to-GDP is expected to hit the all-time record 106% (which occurred just after WWII) within the next 15 years. Beyond that, well, just look at the chart.
Remember that this projection is based on current policy and assumes no recessions, which would drive up debt even further. It also does not account for several other fiscal exposures that would further drive up debts, such as pension failures, natural disasters, housing downturns, or repairing worn down infrastructure.
Interest Payments on Debt will Become Largest Spending Category
The Fiscal Health report identifies health care spending and interest costs as the two largest drivers of our debt. GAO simulations show that federal spending on health care programs is growing at a much higher rate than our economy. In fact, spending on healthcare programs will triple over the next 30 years (from $1.1 trillion to $3.2 trillion in 2018 dollars). This is predominately due to our aging population – Baby Boomers are turning 65 at a rate of more than 10,000 boomers per day.
The increase in debt also has a major side effect – a massive uptick in interest payments. It’s actually the fastest-growing category of federal spending and will eventually become the largest category of spending. We already spend more on interest payments than agriculture, transportation, and veterans’ benefits, combined! Over the next 30 years, interest payments will surpass all non-defense discretionary spending (2024), defense spending (2025), Medicare spending (2042) and Social Security spending (2046).
In other words, during the core of millennials’ working careers over the next 30 years, they will watch their tax dollars be directed towards paying for the profligacy of the past instead of toward investments for the future.
The Longer Congress Waits, the Worse it is For Younger Generations
The GAO report reiterates what we already know: our fiscal trajectory is not sustainable and our leaders in Washington must make changes. But the report also emphasizes that the timing of the change matters. GAO says that “the longer action is delayed, the greater and more drastic the changes will have to be, placing an additional burden on future generations.”
The magnitude of the changes needed right now are already daunting. To close the fiscal gap, spending would have to decreased immediately and permanently by 19 percent ($900 billion in 2018 dollars) or revenue would have to be increased immediately and permanently by 22 percent. The Congressional Budget Office (CBO) has provided similar analysis, finding that to maintain the debt-to-GDP ratio at its current historically high level of 78 percent, Congress will need to cut spending or increase revenues by a combined 1.3 percent of GDP. In today’s dollars, that is $400 billion. Every year. For the next 29 years.
The longer the delay, the harder the spending cuts and tax increases will have to be. This is why it’s so important for younger Americans to proactively push for fixes now.
Fortunately, GAO provides lawmakers a list of suggestions that can help turn this ship around. These include addressing the $151 billion in annual improper payments; cutting into the $458 billion annual tax gap (the difference between taxes owed and taxes paid); addressing duplication, overlap and fragmentation in federal programs; and enhancing the integrity of federal data that helps decision makers. Of course, we will never fully tackle the problem without putting our entitlement programs on a sustainable path.
Unfortunately, despite yet another report detailing our perilous fiscal outlook, the only budget conversation happening in Congress right now is how much they should increase spending next year. Damn the torpedoes!
As we have outlined before, both parties have an unquenchable desire to drive up deficits for their own political goals. They can get away with this because they do not think there is any political cost from the generation that their decisions are negatively impacting. This must change. It’s time for younger Americans to tell Washington to stop financing their political aspirations with our economic futures.