The roar has dimmed in the national debt policy arena lately. That’s because we’ve pushed the potential congressional debt standoff to next year in order to avoid another government shutdown during an election year. The United States’ fiscal deficit has shrunk enormously since the depths of the Great Recession, from more than a trillion dollars to around $500 billion. This may lead you to believe that the calm in the storm means our national finances are looking rosier. Besides, it’s a long-term problem that will probably fall on young people. As former President Herbert Hoover once said, “Blessed are the young, for they shall inherit the national debt.”“We don’t have an immediate fiscal crisis,” said David Wessel, the director of the Hutchins Center on Fiscal & Monetary Policy, at the Brookings Institution. “The deficit this year is below historic averages. We have a long-term budget problem; we’re on track to spend much more than we’ll collect in taxes, and we’ll be adding to our already large federal debt. Congress should be looking at entitlements and at the military and at taxes.”
Though our deficit (aka the difference between revenue and spending in one given year) has shrunk, our total national debt continues to climb. While there’s a lot of alarmism around the national debt that in some cases clearly is misleading, there’s one statistic that speaks volumes about the future of our country’s finances–the percentage of our budget that we spend on interest.
The Congressional Budget Office projected interest will account for a whopping 13 percent of federal outlays by 2026 (that’s without any new tax or spending legislation). Today, we only spend 6 percent of our federal budget on interest. Much of the increase in interest payments is projected to come from rising interest rates, since they’re currently at all-time historic lows.
“High interest payments make it much more difficult to fund, without large tax increases on the middle class, functions of government that many people support,” said Jared Meyer, a fellow at the Manhattan Institute and co-author of Disinherited: How Washington Is Betraying America’s Young. “We can already see this problem playing out on the state and local level, where discretionary spending (such as police and teacher salaries or road and park maintenance) needs are being sacrificed to meet ballooning mandatory spending bills.”
The danger, Wessel pointed out, is that interest payments will crowd out spending on essential government programs. “The problem is that over the next couple of decades, we’ll be borrowing more and more – much of it overseas – and there’s a risk that spending on interest will crowd out spending on other government programs,” said Wessel.
Contrary to what presidential candidates are promising on the campaign trail, our present obligations are already massive. It’s going to be hard to deliver what politicians promised in the past, never mind new programs or tax cuts.
“There is no way to fix America’s long-term budget problems without addressing entitlement spending,” said Meyer. “Social Security and Medicare account for almost 40 percent of federal spending. These programs were created and then essentially set on autopilot growth. In 1940, there were 159 workers for each retiree. Today, there are fewer than three. We got into this mess because politicians continually made unfunded promises to increase entitlement benefits–without increasing contributions–and pushed the higher costs on to younger generations.”
“Trump and Cruz are proposing big tax cuts without identifying spending cuts anywhere near large enough to pay for them,” said Wessel. “Based on Tax Policy Center analysis, they’d add hugely to the federal debt. I doubt they’d get through Congress. Bernie Sanders has big ideas about increasing government spending and he has identified tax increases that he says will pay for that spending.”
In sum, our national finances are like a very slow-moving car accident that need to be addressed at some point to prevent disaster. Needless to say, it’s a complex and a nuanced issue that is going to require a great deal of bipartisan support. If you want to learn more about the policy specifics of fixing our country’s budgetary woes, try playing the online computer game called “The Fiscal Ship” that Wessel created in a partnership between the Hutchins Center at Brookings and the Woodrow Wilson International Center for Scholars.