One Year of Sounding the Debt Alarm at Cato

  • August 17, 2023
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Romina Boccia

This month marks my one‐​year anniversary as Director of Budget and Entitlements Policy at the Cato Institute. When I joined last August, I set out to prevent a fiscal crisis in the United States and restrain the federal budget leviathan. Here’s a recap of major fiscal events that have occurred since and how things are going:

Fitch Ratings downgrades U.S. debt. This August, Fitch Ratings, one of three major credit agencies, followed Standard & Poor’s (S&P) in downgrading the U.S. debt from AAA to AA+. Unlike in 2011 when S&P announced its decision, this time U.S. bond yields rose. While bond yields declined immediately following the announcement, they have risen since, in part due to expectations of interest rates remaining higher for longer. Greg Ip with the Wall Street Journal argued that Fitch’s downgrade matters more now, than did S&P’s in 2011, because economic conditions have changed: “The global savings glut—the wall of money in search of safe assets that kept yields down a decade ago—is no more.” Congress should take this downgrade as a wake‐​up call to establish a credible mechanism for stabilizing the debt.

Congress and the President waive the debt limit. After House Republicans put forth a modest opening bid to raise the debt limit by first making a small downpayment on reducing the growth in the debt, the administration and Congress agreed to a rather shady debt limit deal in late May. The deal (the Fiscal Responsibility Act) established new spending limits on defense and non‐​defense discretionary appropriations, which make up a declining 28 percent of the federal budget. By leaving the biggest federal programs untouched, the deal leaves the debt crisis unresolved. Thanks to “side deals” and allowing for open‐​ended “emergency” spending, even those modest savings are unlikely to materialize. Meanwhile, suspending the debt limit through January 2025 will likely allow for about $3 trillion in additional debt accumulation.

Congress begins to ponder a new mechanism for stabilizing the debt. There’s a glimmer of hope that Congress will take action to correct the unsustainable fiscal course before it’s too late. I began advocating for an independent commission to help Congress address the main drivers of spending growth—Medicare and Social Security—back in February. To avoid yet another failed congressional commission, I recommend Congress staff the commission with independent experts and fast‐​track its proposal, following the Base Realignment and Closure model. In June, House Speaker McCarthy indicated interest in establishing a BRAC‐​like fiscal commission to stabilize the U.S. debt. Since then, a diverse group of members have joined together as the Bipartisan Fiscal Forum to explore such a commission. I am excited to support interested members of Congress in building this proposal out and I am optimistic that we can overcome concerns that Congress would delegate too much responsibility to an unelected body. I am particularly grateful for renowned conservative columnist George Will’s column for grappling with questions of constitutional queasiness considering the challenge before us.

Congress passed an irresponsible omnibus spending bill. As has become all too common, Congress passed a so‐​called Christmas tree bill in late December that drove up spending and debt, waived PAYGO (a budget rule forcing Congress to pay for certain deficit spending or face automatic spending cuts), was chock full of earmarks, and snuck through unrelated policy provisions such as components of the Secure 2.0 Act, which expanded the welfare state and changed certain retirement policy provisions. I am worried we may be looking at a similar effort this December with the House and Senate deeply divided over discretionary spending levels, how to fund federal disaster relief accounts, and whether to provide additional emergency spending for Ukraine. Members are more likely to vote for bills they disagree with against the threat of a government shutdown and the prospect of spending the holidays in D.C. I predict a continuing resolution into early December at first, and Congress kicking that can again to Christmas once legislators realize they can’t get their way, unless they up the pressure.

President Biden introduced a tax‐​and‐​spend budget. Amid high inflation sucking up the purchasing power of American families and driving up credit card debt as households struggle to make ends meet, President Biden introduced an unserious budget proposal in March. The President’s budget would have raised taxes and Americans’ cost of living while failing to address the unsustainability of Social Security and papering over Medicare’s trust fund exhaustion by borrowing from other parts of the budget. As an agenda for what the administration has coined as Bidenomics, this budget would do more harm than good.

Only the Republican Study Committee proposed a congressional budget. With the fiscal year coming to an end this September, neither the House nor Senate Budget Committees have released budget proposals, as dictated by law. Only the Republican Study Committee (RSC) managed to present a nonbinding budget proposal aimed at achieving budget balance, cutting taxes, and reducing red tape to unleash growth in June. With reforms to major health care programs, including Medicare and Medicaid, as well as modest changes to Social Security, the RSC budget is a welcome start toward tackling the growing federal debt crisis. For members of the congressional budget committees, perhaps it’s time to revive “no budget, no pay” as an added incentive.

Social Security needs fundamental reform. Social Security turned 88 this year. The program is financially unsound, poorly targeted, and economically harmful in its current form. Democrats are continuing to push Rep. Larson’s (D‑CT) Social Security 2100 Act, which would increase the cost of benefits in a misleading manner (phasing out new benefit increases after five years to keep the bill’s budget score low) while increasing payroll taxes permanently, first for households making more than $400,000 annually and eventually for everyone. Republicans haven’t rallied around a shared proposal yet. Sen. Cassidy (R‑LA) has floated limited provisions from his bipartisan effort with Sen. King (I‑ME), including increasing the retirement age (good!) and borrowing to invest taxpayer dollars in the stock market to finance Social Security benefits from the gains (bad!). Social Security reform will require bipartisan support and time is running out as the program’s trust fund ledger will be depleted in the next 10 years. The longer Congress waits, the fewer options remain for gradual benefit changes that protect the most vulnerable seniors without hurting American workers with higher taxes and a slower‐​growing economy.

Another Christmas tree bill down the road?

Congress faces several upcoming fiscal deadlines for the remainder of this year, including the end of the fiscal year this September 30, the expiration of the 2018 farm bill, and the possible exhaustion of the federal disaster relief fund as early as this month. Members of Congress are already discussing a new emergency supplemental to shore up disaster relief accounts and more, in part to sweeten a potential deal to kick the can down the road on continuing government spending past September 30 and extending current farm bill policies for several more months.

We must get Congress out of the habit of punting tough decisions to the days leading up to the Christmas holidays. Taxpayers are never served well by a last‐​minute deal forged against the backdrop of lawmakers missing quality time with their families. Incentives matter and in this case they are stacked against the American people.

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