As if this month’s warning that the federal budget deficit was pushing $2 trillion wasn't bad enough, a new analysis out today shows it growing to $3 trillion in 10 years.
And worse: payment on the interest will eat three-quarters of tax revenue.
“In short, Washington is on a totally unsustainable fiscal path, and a debt crisis is coming,” said the new Manhattan Institute report from budget expert Brian Riedl.
Almost all of the shortfall can be blamed on Social Security and Medicare spending, he said.
Riedl’s report, shared with Secrets, is a blunt assessment of the nation’s fiscal situation and it includes an equally blunt list of solutions starting with cuts to spending and tax increases.
It also includes a warning to conservatives : Act fast, or the result will be massive tax hikes in the future to keep Washington afloat.
It is a long and thorough report, but here are the highlights.
He writes in the summary, “Annual budget deficits doubled to $2 trillion over 2022–23 and are headed toward $3 trillion a decade from now. Social Security and Medicare face a combined $124 trillion cash deficit over the next 30 years. The national debt is projected to soar past 165% of gross domestic product (GDP) within three decades — or as high as 300% of GDP if interest rates remain elevated and Congress extends expiring policies."
The summary continues, "At that point, interest costs could consume half to three-quarters of all federal tax revenues. Unless reforms are enacted, Washington’s escalating borrowing demands will come to overwhelm the capacity of financial markets to supply this much lending at plausible interest rates. When that event occurs, or even approaches, interest rates will soar and the federal government will not be able to pay its bills, with dire consequences for the U.S. economy.”
He has four tiers of fixes:
Tier 1: Squeeze out inefficiencies from the major health programs driving spending upward (as close to a free lunch as is available).
Tier 2: Trim Social Security and Medicare benefits primarily for upper-income retirees (who can most afford the changes).
Tier 3: Trim other federal programs to the extent feasible on a bipartisan basis.
Tier 4: Close the remaining gap with new taxes in the least damaging manner possible.
The report realizes the political hurdles, especially in an election year : “American presidents, lawmakers, and even voters are in deep denial of the fiscal reckoning that is ahead. Interest rates are already rising, and politicians have made popular long-term spending commitments that vastly exceed what they are willing to tax and what the financial markets will be able to lend."
The report continues, "The only decision is whether Washington gradually imposes savings proposals on its own terms, or whether it waits for a debt crisis to impose much more drastic and painful savings reforms."
But, he said, action is required soon to avoid a tax-heavy solution.
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“If lawmakers wait another five to 10 years, they will likely have missed the window on entitlement reform; and tax increases, including a VAT of 10%–15%, will become overwhelmingly likely to avoid a debt spiral,” he wrote, adding, “Conservatives can either: 1) concede 2% of GDP in limited taxes now, as part of a grand deal with fundamental spending reform; or 2) wait 10 years and end up with little to no spending savings and a European-size VAT.”
See the full report here.
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