The Debt Crisis: Where Do We Go From Here?
the fiscal health of the federal government has rapidly deteriorated and needs repair. But, if the nation’s leaders are to fix this issue, then they will have to implement major reforms, despite how politically unpopular they may be.
In 1981, the US national debt was $3.18 trillion. In 2001, the debt was $9.67 trillion, while today it is over $31 trillion. As a percentage of GDP, US debt nearly doubled from 63% of GDP in 1996 to roughly 121% in 2022. Despite 2021’s record low average interest rate of 1.605% on federal debt, 8% of all government expenditures go towards interest payments for an annual total of $475 billion in the following year. Evidently, the fiscal health of the federal government has rapidly deteriorated and needs repair. But, if the nation’s leaders are to fix this issue, then they will have to implement major reforms, despite how politically unpopular they may be.
To better see where reform can be made, it is imperative to first break down the categories where the government spends the most and how government spending is projected to change overtime. In 2022, the largest expenditure was Social Security, where 19% of all outlays went to the program for a total of $1.2 trillion. The second and third largest expenditures were on health and income security, making up 15% and 14% each. Next, national security made up 12% of total spending for a total of $767 billion. Rounding out the top five is Medicare spending, for which the government spent $755 billion. Sans reform, expenditures on Medicare and Medicaid are expected to rise from 2021’s $1.4 trillion to $2.7 trillion in 2032, and the Congressional Budget Office (CBO) projects total federal spending to rise to 30% of GDP in 2050, up from the 21% of GDP in 2019. Indeed, according to the CBO, most of this increase will be due to “rising interest costs and growth in spending on the major health care programs and Social Security—driven by the aging of the population and growth in health care costs per person.”
It is important to note, however, that much of the most recent spike in spending was due to the COVID-19 pandemic and the government’s stimulus programs to protect unemployed workers and boost economic recovery. Nonetheless, the years preceding the pandemic saw deficits rise from $440 billion in 2015 to just under $1 trillion in 2019, in part because of the increased discretionary spending and tax cuts of the Trump administration. More importantly, there is an underlying over-spending problem in non-COVID welfare programs as well as a longstanding under-taxation problem. Despite near record-high federal tax receipts of 19.6% of GDP in 2022, and a projected tax revenue of 19.1% in 2050, the United States remains a low-tax country among its Western peers. Indeed, national (federal, state, and local) tax revenue as a percentage of GDP was 26.6% in 2021, much lower than the 34.1% average among OECD countries.
Fiscal reform must therefore be focused on either increasing revenue, curbing spending, or some combination of both. On the revenue side, the US under-‘performs’, relative to the OECD, in taxing the transactions of goods and services (4.4% of GDP compared to an OECD average of 10.6%) and in collecting Social Security payments (6.4% of GDP compared to an OECD average of 9.2%). One may naturally argue, then, that increasing the payroll tax or instituting a national sales tax would help fix these issues. The problem, however, is that payroll and sales taxes are quite regressive and may exaggerate economic inequality. Increasing more progressive taxes, such as personal income taxes, may be an alternative. On the spending side, serious changes to current entitlement policy should be considered, such as gradually raising the national retirement age or restricting retirees with a large level of private savings and wealth from receiving Social Security payments. Regarding the last reform, the Social Security Administration reports that “Social Security benefits in 2014 accounted for between 54 percent and 72 percent of family income in the three lowest income quintiles, compared with 18 percent to 34 percent of family income in the two highest quintiles.” Higher income Americans do not need Social Security as much as lower income citizens, so reforms restricting Social Security. should be aimed at wealthier retirees.
Nonetheless, some of these policies would be rather unpopular. Polls from Pew Research Center report that roughly half of Americans believe they already pay more than their fair share in taxes, and tax increases are generally only supported if they specifically target the wealthiest of citizens. Raising the needed revenues may turn out to be quite difficult. Yet politicians need not be too hesitant of reform. The University of Maryland’s Program for Public Consultation, for instance, found that large majorities support raising the payroll tax cap, the payroll tax in general, and the retirement age, along with reducing benefits for high earners. The debt crisis is fixable, but only if politicians have the courage to act in time.
Written by Henry Olsen