2025: A Pivotal Year for America’s Fiscal Future
As a new Congress and administration descend on Washington, they will face critical decisions that will define our economic future. The choices made—or avoided—this year could determine whether the United States averts a fiscal crisis or plunges further into unsustainable territory. The time to act decisively by putting the US budget on a path to balance is now.
Last year’s reckless year-end spending package served as a grim reminder of the fiscal irresponsibility that has pushed US debt to 100 percent of GDP. The new Congress has an opportunity to start a new chapter—one that prioritizes fiscal discipline and ensures a sustainable future that enables economic growth to benefit all Americans.
Four looming fiscal deadlines in 2025 demand urgent attention: the return of the statutory debt limit, and the expiration of discretionary spending caps, key provisions of the 2017 Tax Cuts and Jobs Act (TCJA), and expanded Obamacare subsidies. We explain these deadlines in greater depth in our new paper, “A Fiscal Agenda for the 119th Congress: The 2025 Fiscal Cliff Calls for Spending Restraint,” which was just published by the Cato Institute. In it, we call on Congress to meet these challenges with a firm commitment to fiscal responsibility and economic growth or risk greater inflation, higher interest rates, and subsequent voter backlash come the 2026 midterm elections.
The Debt Limit: An Action-Forcing Tool for Real Reform
The statutory debt limit, reinstated on January 1, 2025, presents a key turning point for Congress to adopt a credible deficit-reduction plan that will put the US budget on a path to long-term balance. While some voices, including President Trump, have floated the idea of eliminating the debt limit altogether, doing so would strip away a critical fiscal guardrail. Combined with a potential $5 trillion increase in deficits from extending TCJA provisions without offsets, this could rattle bondholders and send Treasury rates soaring, undermining economic stability.
Instead, Congress should pair any debt limit increase with concrete spending reforms grounded in fiscal targets, such as stabilizing the debt-to-GDP ratio at 100 percent or less over the next decade. To achieve this essential goal, Congress should consider authorizing an independent fiscal commission modeled after the successful BRAC (Base Realignment and Closure) process to address unsustainable entitlement spending—the main driver alongside interest costs of rising spending and debt.
While some are suggesting that the debt limit is dangerous by forcing Congress to take an uncomfortable vote to authorize the Treasury to borrow the money that Congress has appropriated, what’s actually dangerous is the unsustainable fiscal course we’re on. By leveraging the debt limit to enact meaningful reforms, Congress can make a real difference toward putting the US budget on a path to balance, and thereby signal to markets that the United States is serious about fiscal responsibility. Eliminating the debt limit without replacing it with a stricter and more effective fiscal mechanism, such as a Swiss-style debt brake, would be reckless.
Tax Cuts and Fiscal Discipline: A Defining Test for Republicans
The expiration of key TCJA provisions at the end of 2025 offers another critical test. Extending these tax cuts without offsetting spending reductions or new revenues could add an estimated $5 trillion to deficits over the next decade, further fueling inflation and interest rate increases. Republicans must resist the temptation to kick the can down the road and instead commit to extending pro-growth tax cuts within a deficit-neutral framework.
This means eliminating inefficient tax breaks and corporate welfare and pairing tax cut extensions and expansions with reductions in spending. A fiscally responsible approach to tax policy will strengthen economic growth, including by avoiding the dousing of further fuel on the deficit fire.
Discretionary Spending Caps: Holding the Line on Waste and Improper Spending
The expiration of discretionary spending caps after FY 2025 threatens to unleash unchecked growth in non-essential spending. Congress should reinstate binding caps with a modest 2 percent annual growth limit, close loopholes that allow the abuse of emergency designations and similar budget gimmicks to bypass those caps, and cut wasteful and duplicative programs as well as pet-peeve spending that is improper for the federal government to undertake.
The Expiration of Expanded Obamacare Subsidies
The expanded Affordable Care Act subsidies, extended through 2025 by the Inflation Reduction Act, are poised to expire. Congress should let them go. These subsidies have inflated federal spending while failing to tackle the root causes of high health care costs. Allowing the subsidies to expire would prevent the entrenchment of temporary programs that worsen fiscal imbalances. Instead, Congress should prioritize reforms that reduce government intervention in health care, enable market competition, and address regulatory burdens and misaligned financing issues to lower costs and improve health care for all Americans.
DOGE and the Case for a Fiscal Commission
The Department of Government Efficiency (DOGE), tasked with identifying wasteful spending and harmful regulations, sounds promising. But its recommendations, due in 2026, are only part of the solution. Pairing DOGE’s work, which will focus on executive actions, with a congressionally authorized fiscal commission, to advance legislative changes, could provide the political momentum needed to enact difficult reforms, especially to entitlement programs.
That’s where the real root of the fiscal problem lies: unfunded obligations to politically favored senior citizens who collect far more in Social Security and Medicare benefits than they paid for. Congress should stop dancing around the core issue and get serious about a path to reform.
A BRAC-like process, with Congress empowering independent experts to identify changes based on specific, narrow guidelines, could overcome legislative gridlock and bring about the future sustainability of programs like Social Security and Medicare. If successful, such a commission could help the US avoid the entitlement-driven debt crisis that’s advanced significantly since 2010, when baby boomers began retiring in large numbers.
The University of Pennsylvania’s Penn Wharton Budget Model (PWBM) researchers have stated quite bluntly that the United States has “about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation).” The sooner Congress acts, the less painful and the more gradual necessary reforms can phase in without upending our economic growth engine.
A Warning and a Path Forward
The stakes couldn’t be higher. The consequences of inaction—higher inflation, skyrocketing interest rates, and a fiscal crisis—are all too real. But by committing to responsible deficit reduction, Congress and the Trump administration can chart a path to economic prosperity.
Our just-published policy analysis provides a roadmap for achieving fiscal sustainability, including detailed recommendations on how to address these 2025 deadlines responsibly. The time for action is now. Failure to act decisively will not only burden future generations with insurmountable debt but also threaten the aspirations of millions of Americans today.
Read the summary preview of our policy analysis here.