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How Will We Handle The Mushrooming National Debt?

National Debt

EDITOR NOTE: It’s no surprise that the US national debt is at a crisis level. Last year, our outstanding federal debt was at 79% of our GDP. This year, it’ll rise to 101% of GDP. Next year, a government agency predicts it’ll rise to 108% of our GDP. There’s a word to describe such a debt-to-income ratio for individuals: insolvency. Practically speaking, the US is virtually insolvent. The only way it can climb out of its debt is to increase income and decrease spending. And how does it generate its income? Taking money out of your pockets in the form of taxation, and drastically reducing programs (such as Social Security, Medicare, and Medicaid) that you’ve paid into. The government is sacrificing the financial well-being of its citizens for its own errors and its lack of fiscal responsibility.

Congress has appropriated more than $3 trillion in coronavirus relief spending so far, as businesses shut down nationwide and millions of workers lose their jobs. More stimulus money is probably on the way.

That’s all borrowed money, and it’s pushing American’s national debt to uncharted levels. The federal deficit this year is headed to $3.7 trillion, according to the Congressional Budget Office. That’s more than twice as large as the next worst annual deficit, in 2009. The total amount of outstanding federal debt has soared from 79% of GDP in 2019 to 101% this year, and will hit 108% next year, CBO says.

“We had a budget situation that was unsustainable prior to the pandemic,” Douglas Holtz-Eakin, president of the American Action Forum, says in the latest episode of the Yahoo Finance Electionomics podcast. “We're going to come out of and look at a situation that is dramatically worse. And what is Congress going to do? I worry about that all the time.”

Holtz-Eakin was director of the CBO from 2003-2005, when the public debt was a mere 35% of GDP. Before the coronavirus pandemic, the ceaseless growth of Medicare, Medicaid and other federal health programs was the main driver of rising debt—something Congress has never addressed. Social Security is swelling as well, as baby boomers retire. Defense spending is high. And the 2017 Trump tax cuts depleted federal revenue without corresponding cuts in spending, pushing annual deficits to record highs outside of wars or recessions.

Then came the coronavirus recession, which has put the federal debt on an even worse trajectory. The tripwire for a crisis might be Medicare, the health program for seniors, which could begin to run short of money as early as 2023. Since Medicare is funded by a payroll tax, a plunge in the number of workers paying that tax is an alarming development.

When the time for a fix arrives, Congress will have to start in the biggest programs, since that’s where the money is. “You cannot rely on what we have relied on so far—cuts in annual discretionary spending, which are less than a third of the budget,” Holtz-Eakin says. “You have to take on the mandatory entitlements—Social Security, Medicare, Medicaid, the Affordable Care Act.”

Lasting solutions will have to include modifications to those programs, such as income limits on who qualifies, higher eligibility ages and perhaps less generous benefits. Tax hikes are probably inevitable too. That could include higher taxes on businesses and the wealthy, the elimination of many corporate deductions and perhaps a new value-added tax at the national level.

To truly solve the budget problem, legislation would have to be bipartisan, to assure one party doesn’t sweep to power and undo what the other party put in place. “The American people are wary of that single party jam-something-big-through,” Holtz-Eakin says. When Democrats did that with the Affordable Care Act in 2010, they lost control of the House in the 2010 midterm elections. When Republicans did it with the Tax Cuts and Jobs Act in 2017, they lost control in the 2018 midterms.

Defense spending is another obvious target, except Holtz-Eakin points out the defense budget has many of the same retirement and health care obligations as the broader federal budget. So cutting spending on troops and weapons wouldn’t go all that far without broader reforms.

There are many plans for how to get federal spending under control, with most including a combination of tax hikes, spending cuts and benefit modifications. The issue is a sleeper in this year’s presidential campaign, however, with President Trump and Democrat Joe Biden both talking a lot more about goodies for voters than fiscal restraint. Trump wants more tax cuts and a big new infrastructure program. Biden favors more federal spending on college, health care, climate change and worker benefits. No politician seeking votes wants to talk about paying down debt, but the next president might be the first one in a long time who has to.

Originally posted on Yahoo! Finance

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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