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Restoring Fiscal Order in the United States

The United States’ federal budget deficit is currently projected to explode, increasing the federal debt to unprecedentedly high levels. A very gradual fiscal consolidation, with federal spending as a share of GDP declining slightly each year, would both raise economic growth and create a more resilient economy.

STANFORD – In recent years, the US government has taken several essential economic-policy steps. The tax reform embedded in the 2017 Tax Cuts and Jobs Act (TCJA), the recent United States -Mexico-Canada (USMCA) trade agreement, “phase one” of a China-US trade deal, and recent regulatory reforms are all needed to revive and strengthen economic growth. It is now time for another essential policy step: correcting the trajectory of fiscal policy.

The Congressional Budget Office’s (CBO) current baseline projection of federal government spending in future years far outpaces federal government revenue, as the figure below clearly shows. The result is an exploding federal budget deficit, which will bring the federal debt as a share of GDP to 144% by 2049, according to the CBO baseline, and likely to the 219% projected in the CBO’s alternative fiscal scenario. These debt levels are unprecedented in US history.

In contrast to previous periods when the deficit fell after similar upward bursts, the current CBO projections show no such reversal. The large deficit will crowd out important federal programs, including needed infrastructure investment, as well as private investment needed for economic growth. Debt service will account for a rising share of spending, and the high debt will likely increase interest rates by more than the CBO assumes, leading to an economically perilous debt spiral.

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