Monday, 22 Apr 2024

The Debt-Limit Deal Suggests Debt Will Keep Growing, Fast

The bipartisan deal to avert a government default this week featured modest cuts to a relatively small corner of the federal budget. As a curb on the growth of the nation’s $31.4 trillion debt load, it was a minor breakthrough, at best.

It also showed how difficult — perhaps impossible — it could be for lawmakers to agree anytime soon on a major breakthrough to demonstrably reduce the nation’s debt load.

There is no clear economic evidence that current debt levels are dragging on economic growth. Some economists contend that rising debt levels will hurt growth by making it harder for businesses to borrow money; others say spiraling future costs of government borrowing could unleash rapid inflation.

But Washington is back to pretending to care about debt, which is poised to top $50 trillion by the end of the decade even after accounting for newly passed spending cuts.

With that pretense comes the reality that the fundamental drivers of American politics all point toward the United States borrowing more, not less.

The bipartisan agreement to suspend the debt ceiling for two years, which passed the Senate on Thursday, effectively sets overall discretionary spending levels over that period. The agreement cuts federal spending by $1.5 trillion over a decade, according to the Congressional Budget Office, by essentially freezing some funding that had been projected to increase next year and then limiting spending to 1 percent growth in 2025.

But even with those savings, the agreement provides clear evidence that the nation’s overall debt load will not be shrinking anytime soon.

Republicans cited that mounting debt burden as a reason to refuse to raise the limit, risking default and financial crisis, unless Mr. Biden agreed to measures to reduce future deficits. But negotiators from the White House and House Republican leadership could only agree to find major savings from nondefense discretionary spending.

That’s the part of the budget that funds Pell grants, federal law enforcement and a wide range of domestic programs. As a share of the economy, it is well within historical levels, and it is projected to fall in the coming years. Currently, base discretionary spending accounts for less than one-eighth of the $6.3 trillion the government spends annually.

The deal included no major cuts to military spending, which is larger than base nondefense discretionary spending. Early in the talks, both parties ruled out changes to the two largest drivers of federal spending growth over the next decade: Social Security and Medicare. The cost of those programs is expected to soar within 10 years as retiring baby boomers qualify for benefits.

While Republicans at first balked when Mr. Biden accused them of wanting to cut those politically popular programs, they quickly switched to blaming the president for taking them off the table.

Asked on Fox News on Wednesday why Republicans had not targeted the entire budget for cuts, Speaker Kevin McCarthy replied, “Because the president walled off all the others.”

“The majority driver of the budget is mandatory spending,” he said. “It’s Medicare, Social Security, interest on the debt.”

Negotiators for Mr. McCarthy effectively walled off the other half of the debt equation: revenue. They rebuffed Mr. Biden’s pitch to raise trillions of dollars from new taxes on corporations and high earners, and both sides wound up agreeing to cut funding for the Internal Revenue Service that was expected to bring in more money by cracking down on tax cheats.

Instead, Republicans attempted to frame mounting national debt as solely a spending problem, not a tax-revenue problem, even though tax cuts by both parties have added trillions to the debt since the turn of the century.

Republican leaders now appear poised to introduce a new round of tax-cut proposals, which would likely be financed with borrowed money, a move Democrats decried during the floor debate over the debt-ceiling deal.

“Before the ink is dry on this bill, you will be pushing for $3.5 trillion in business tax cuts,” Representative Gwen Moore, Democrat of Wisconsin, said shortly before the final vote on the Fiscal Responsibility Act, as it is called, on Wednesday.

Those comments reflected a lesson Democrats took from 2011, when Washington leaders last made a big show of pretending to care about debt in a bipartisan deal to raise the borrowing limit. That agreement, between President Barack Obama and Speaker John Boehner, limited discretionary spending growth for a decade, helping to drive down budget deficits for years.

Many Democrats now believe those lower deficits gave Republicans the fiscal and political space they needed to pass a tax-cut package in 2017 under President Donald J. Trump that the Congressional Budget Office estimated would added nearly $2 trillion to the national debt. They have come to believe that Republicans would happily do the same again with any future budget deals — putting aside deficit concerns and effectively turning budget savings into new tax breaks.

At the same time, both parties have grown more wary of cuts to Social Security and Medicare. Mr. Obama was willing to reduce future growth of retirement benefits by changing how they were tied to inflation; Mr. Biden is not. Mr. Trump won the White House after promising to protect both programs, in a break from past Republicans, and is currently slamming his rivals over possible cuts to the programs as he seeks the presidency again.

All the while, the total amount of federal debt has more than doubled, to $31.4 trillion from just below $15 trillion in 2011. That growth has had no discernible effect on the performance of the economy. But it is projected to continue growing in the next decade, as retiring baby boomers draw more government benefits. The budget office estimated last month that debt held by the public would be nearly 20 percent larger in 2033, as a share of the economy, than it is today.

Even under a generous score of the new agreement, which assumes Congress will effectively lock in two years of spending cuts over the full course of a decade, that growth will only fall by a few percentage points.

Groups promoting debt reduction in Washington have celebrated the deal as a first step toward a larger compromise to reduce America’s reliance on borrowed money. But neither Mr. McCarthy nor Mr. Biden has shown any interest in what those groups want: a mix of significant cuts to retirement programs and increases in tax revenues.

Mr. McCarthy suggested this week that he would soon form a bipartisan commission to scour the full federal budget “so we can find the waste and we can make the real decisions to really take care of this debt.”

The 2011 debt deal produced a similar sort of commission, which issued recommendations on politically painful steps to reduce debt. Lawmakers discarded them. There’s no evidence they’d do anything else today.

Jim Tankersley is a White House correspondent with a focus on economic policy. He has written for more than a decade in Washington about the decline of opportunity for American workers, and is the author of “The Riches of This Land: The Untold, True Story of America’s Middle Class.” @jimtankersley

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