US national debt to surge to record levels without reform, raising prospect of debt crisis
As Americans' political focus turns towards this fall's elections, the winner of the presidential race will be confronted with a national debt that's on pace to reach a record-setting level in the next four years, as well as looming deadlines that may force their hand on fiscal policy.
A recent update to the federal government's long-term budget outlook by the nonpartisan Congressional Budget Office (CBO) found that budget deficits are projected to widen from about $1.9 trillion this year to more than $2 trillion annually starting in 2030, before nearing $2.9 trillion in 2034. In that period, the debt held by the public will rise from more than $28 trillion this year to over $50 trillion in 2034.
When compared to the size of the U.S. economy in terms of gross domestic product, debt held by the public is projected to rise from 99% of GDP this year to 106% of GDP in 2027 in the second half of the next presidential term – which would top a record set in 1946 amid the post-World War II demobilization. Debt to GDP is projected to reach 122% in 2034 and is on track to continue to rise to 166% of GDP in 2054 and higher after that date.
As the debt grows, the risk of the U.S. government facing a debt crisis caused by investors losing confidence in its ability to repay its debt also rises. That would likely cause interest rates to increase, making it more costly to service the existing debt without defaulting.
Although it's unclear what level of debt is a tipping point, some estimates identified by the Congressional Research Service put debt-to-GDP ratios of 80% to 200% and beyond in the danger zone for a crisis. The Penn-Wharton Budget Model in October noted that the "U.S. debt held by the public cannot exceed about 200 percent of GDP even under today's generally favorable market conditions."
"We are not now at an immediate risk of a fiscal crisis, but the rising national debt makes one more likely, and also makes us less prepared to address other unexpected future crises," the nonpartisan Peterson Foundation told FOX Business.
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With the country facing a bleak budgetary outlook, a series of fiscal policy deadlines and changes slated to take effect in 2025 offer lawmakers and the public an opportunity to discuss reforms to alter that trajectory.
The first of those deadlines will arrive on January 1 when the debt limit, which was suspended in June 2023, is reactivated. That will prompt the Treasury Department to use "extraordinary measures" to stave off default for a period of several months while lawmakers in Congress work on the next increase or suspension of the debt limit.
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Next year will also mark the expiration of the budget caps that were included in the Fiscal Responsibility Act, the bipartisan law that also suspended the debt limit and capped discretionary spending through fiscal year 2025, which concludes next September. Congress will have to debate whether to retain those spending caps, let them lapse or impose more stringent requirements when they're debating annual appropriations bills next year.
Several provisions of the Trump tax cuts, known as the Tax Cuts and Jobs Act, are also slated to sunset at the end of next year because the law was crafted using the budget reconciliation process. Reconciliation gives lawmakers a greater opportunity to enact fiscal policies on a party-line basis, but has budget constraints over a 10-year period that lead them to include sunset provisions to ensure their legislation complies with the rules.
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Marc Goldwein, senior vice president and senior policy director at the nonpartisan Center for a Responsible Federal Budget (CRFB), told FOX Business that the slew of fiscal issues on tap next year should compel lawmakers to consider reforms.
"We've got the debt limit coming back, the [Fiscal Responsibility Act] spending caps expiring, a bunch of tax cuts expiring. So I don't know how you could make it through next year and not have a conversation about fiscal policy – it's so central to everything that's going on and people are feeling it in their pocketbooks when they're facing higher mortgage rates and higher costs at the grocery store," Goldwein said.
Rachel Snyderman, managing director of the Bipartisan Policy Center's Economic Policy Program, echoed that in an interview with FOX Business and said 2025 presents "immense opportunity for lawmakers to lead the year with fiscal responsibility front and center."
"It's really time for Congress to take stock of the fiscal situation and on a bipartisan basis, promote policies that can grow the economy, support American families and workers, but be underpinned by fiscal responsibility. That's going to take looking at both the revenue and spending side of the equation," she added.
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Addressing the federal government's broader fiscal woes will also require policymakers to consider reforms to the two main mandatory spending programs, Social Security and Medicare.
The two programs are funded by a combination of payroll taxes and reserves in their trust funds, which are on pace to be depleted in roughly a decade.
Social Security's two main trust funds are on track to be tapped out in 2035, when just 83% of benefits would be payable to beneficiaries. Medicare's trust fund that finances hospital care and treatment after hospital stays is projected to be depleted in 2036, when 89% of benefits would be payable.
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Despite those fast-approaching dates, America's political leaders appear to have set aside a debate over reforming those programs in the midst of a contentious election. At the first presidential debate of the 2024 election cycle, both President Joe Biden and former President Donald Trump said that they would leave Social Security untouched in a second term.
"We have not found a public consensus on reforming Social Security and Medicare to ensure that benefits aren't cut when their primary trust funds are depleted," Snyderman noted. She added that policymakers should start looking at potential reforms now so that their implementation is less jarring as the trust funds near their exhaustion.
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Democrats and Republicans generally have vastly divergent views over the causes and preferred remedies to the federal government's fiscal woes – which will make a future policy debate over reform proposals an animated one.
"The fundamental problem that this country has is a spending problem," said David McGarry, policy analyst with the conservative Taxpayers Protection Alliance, in an interview with FOX Business. "And this is a place where I will criticize Democrats specifically because they want to paint the situation as if increasing taxes on the wealthy or maybe instituting a wealth tax or a so-called billionaires tax will immediately solve whatever problems we're facing. That's simply untrue."
Brendan Duke, senior director for economic policy at the liberal Center for American Progress, told FOX Business: "We can stabilize the fiscal outlook and keep borrowing costs at manageable levels if we are willing to reverse the mistake of two and a half decades of unpaid for tax cuts tilted to the wealthy and corporations. Requiring that they pay their fair share is sufficient to stabilize the fiscal outlook without reducing low- and middle-income Americans' living standards."
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Aside from the looming fiscal policy deadlines in 2025 and in the next decade, another potential forcing mechanism for a debate and political action on these issues lies in a bipartisan proposal approved earlier this year by the House Budget Committee.
The Fiscal Commission Act would establish a 16-member panel including members of Congress and a private sector expert who would develop recommendations to stabilize the debt-to-GDP ratio at or below 100% within 10 years, improve the solvency of trust funds for at least 75 years and balance the budget at the earliest reasonable date. Its recommendations would have to be voted on by the House and Senate before the end of the current Congress.
Though the bill hasn't received a vote on the floor of either chamber of Congress, its potential enactment could help spur the debate over the country's fiscal problems or it could serve as an impetus for bipartisan discussion about the nation's finances.
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"We don't need bipartisanship to fix the debt, but it sure makes it a heck of a lot easier. Bipartisan policies are much more durable, they're much more sustainable, they're much more likely to make it through a Senate that's almost always going to have at least 41 members from the opposing party," Goldwein said.
"There are hard choices that need to be made, but the solutions are there and they are easier to take care of now than if we allow the situation to get worse and kick the can down the road," Snyderman said.