.webp)
With the presidential election coming to a merciful end in the coming weeks, analyses of the candidates’ campaign promises show that the budget deficit and the share of the debt held by the public would only grow larger. The Committee for a Responsible Federal Budget, for example, estimates that Donald Trump’s campaign proposals would add a net $15 trillion to the debt over ten years while Vice President Kamala Harris’s policy offerings would add as much as a net $8.1 trillion over the same period.
The reckless disregard for the budget deficit and debt isn’t new to presidential campaigns. Even when it has been mentioned in recent election cycles, candidates almost always ignore than real drivers of budget deficits and debt. Rather than have an adult conversation with voters, the spending cuts that get mentioned aren’t impactful and dwarf in comparison to the promises of spending increases and/or tax cuts that candidates propose.
Meanwhile, the Congressional Budget Office (CBO) reports that the preliminary budget deficit for FY 2024, which ended on September 30, was $1.834 trillion. Although that figure is $86 billion lower than the deficit projection the CBO released in June, the growth of the deficit over the next ten years is alarming. That’s before any campaign proposals are pushed through Congress by the next president.
The CBO baseline—which is based on current law—projects that the budget deficit will grow from $1.938 trillion in FY 2025 to $2.861 trillion in FY 2034, with cumulative deficits of more than $22 trillion over the ten-year period. The growth of the budget deficit is driven primarily by outlays for Social Security and Medicare benefits. Outlays for these programs are based almost entirely on the number of beneficiaries enrolled in them. As such, the share of the debt held by the public is projected to rise from $29.711 trillion to $50.664 trillion, or 101.6 percent of gross domestic product (GDP) to 122.4 percent.
Although Social Security and Medicare Hospital Insurance (Part A) benefits are financed through payroll taxes into their respective trust funds, other Medicare programs—Medical Insurance (Part B) and the Prescription Drug Benefit (Part D)—are financed through contributions from the federal government, not including premiums. Social Security and Medicare are 34.4 percent of federal spending in FY 2024. Factor in net interest on the share of the debt held by the public, that figure rises to 48.4 percent. Add in Medicaid—another program for which outlays are based on beneficiaries—it jumps to 57.6 percent.
In FY 2025, Social Security, Medicare, Medicaid, and net interest are projected to consume 58.8 percent of all federal spending. In FY 2034, these four budgetary items are projected to reach 66.4 percent of federal spending. Discretionary outlays—which is the part of federal spending that Congress argues about every September—is expected to decline both as a share of federal spending and as a percentage of GDP.
Now, you may say, “Jason, why does this matter? It’s not like it’s real money.” I’m so glad you asked. Those of us who follow the federal budget have a tendency to talk about federal spending in percentages and such large sums of money that it’s difficult for those who aren’t familiar with the topic to wrap their minds around it. We rarely communicate what it means in the real world. One of those real world effects is the looming insolvency of the Social Security Old-Age and Survivors Insurance Trust Fund in 2033 and the Medicare Hospital Insurance Trust Fund in 2036. When the trust funds are depleted, beneficiaries will face benefit cuts or Congress will bail out the trust funds. Congress could, of course, modernize the programs to bring them into the 21st century.
When Congress runs a deficit, it has to borrow money to finance that spending. The Treasury Department issues securities—these are bills, bonds, and notes—that when purchased provide the federal government with cash to meet its obligations. Those securities are purchased by various entities, most of which are domestic, including the Federal Reserve, which is the single largest holder of debt. (This is known as “quantitative easing”—a fancy term for debt monetization.) However, other countries purchase these securities.
Treasury securities are seen as a safe investment, but there’s plenty of reason to doubt whether that will remain true in the future. After the 2011 congressional debate over the debt limit and Budget Control Act, one of the major credit rating agencies, Standard and Poor’s, downgraded the United States’ long-term credit rating. Another major credit reporting agency, Fitch Ratings, similarly put Congress on notice after the passage of the Fiscal Responsibility Act.
Standard and Poor’s and Fitch Ratings’ actions are notable because both cited the long-term fiscal issues caused by rising debt and the failure of Congress to effectively govern to solve those long-term fiscal issues. In other words, the inability of Congress to reach bipartisan consensus to solve the fiscal challenges that face the United States has put us on a precarious road that leads us straight to a sovereign debt crisis.
We’re already beginning to see warnings of a potential risk to the economy that will affect the economy that will affect American families and businesses. As Congress continues to avoid these serious fiscal issues, credit rating agencies will continue to reassess the riskiness of Treasury securities used to finance the debt Congress runs up. This is the topic of a recent research paper authored by Roberto Gomez-Cram, Howard Kung, and Hanno Lustig. The authors write, “In response to COVID, U.S. Treasury investors seem to have shifted to the risky debt model when pricing Treasurys. Policymakers, including central banks, should internalize this shift when assessing whether bond markets are functioning properly. In the risky debt regime, valuations will respond to government spending shocks, which may involve large yield changes in bond markets. In this environment, largescale asset purchases by central banks in response to a large government spending increase have undesirable public finance implications.”
The result will be higher interest rates to continue to make Treasury securities attractive in the market so that the federal government can finance the large debt that Congress will accumulate. This increase in interest rates will make borrowing for homes, vehicles, business expansion, and so on more expensive for borrowers. In other words, the cost of living will continue to rise by Congress’s inability to modernize Social Security and Medicare and, by extension, rein in the growth of public debt.
It’s an entirely predictable crisis that we are staring down, but doing nothing—which has been the preferred approach by the political class, Republican and Democrat alike—is a race to the bottom. Actually addressing this problem takes away political bludgeon during election cycles used to further polarize Americans, and it will backfire unless young voters—Millennials and Gen Z—demand that Congress fix the problems that it has avoided for far too long.
