Following four years of trillion-dollar deficits, the national debt reached $17 trillion and exceeded 100 percent of gross domestic product (GDP). Publicly held debt (the debt borrowed in credit markets, excluding Social Security’s trust fund, for example) is alarmingly high at three-quarters of GDP. Without further spending cuts, it is on track to rise to a level last seen after World War II, and the worst is yet to come.
High federal debt puts the United States at risk for a number of harmful economic consequences, including slower economic growth, a weakened ability to respond to unexpected challenges, and possibly a debt-driven financial crisis.
Deficits fell in 2013 because President Obama and Congress raised taxes, a slight improvement in the economy helped to bring in more revenue, and spending cuts from sequestration and spending caps under the Budget Control Act of 2011 took effect.
Lawmakers should not take this short-term and modest deficit improvement as a signal to grow complacent about reining in exploding spending. Though deficits will decline for a few more years, within a decade they will again exceed $1 trillion. The Congressional Budget Office projects that federal spending, despite sequestration cuts, will grow 69 percent by 2023, driving deficits higher.
The nation’s long-term spending trajectory remains on a fiscal collision course. Total spending has exploded by 40 percent since 2002, even after inflation, and some programs have grown far more than that. Defense, however, is being cut. As a share of the economy, defense is on course to drop below 3 percent of GDP in less than a decade, down from 4.5 percent in 2011. Social Security, Medicare, and Medicaid are so large and growing that they are on track to overwhelm the federal budget. The Affordable Care Act, or Obamacare, further adds to the problem. By 2023, these entitlement programs combined will consume half of the entire federal budget.
The long-term unfunded obligations in the nation’s major entitlement programs loom like an even darker cloud over the U.S. economy. Demographic and economic factors will combine to drive spending in Medicare, Medicaid (including Obamacare), and Social Security to unsustainable heights. The major entitlements and interest on the debt are on track to devour all tax revenues before mid-century.
Over the 75-year long-term horizon, the combined unfunded obligations arising from promised benefits in Medicare and Social Security alone exceed $48 trillion. The federal unfunded obligations arising from Medicaid, and even from veterans’ benefits, are unknown but would likely add many trillions more to this figure.
While the Budget Control Act of 2011 and sequestration are modestly restraining the discretionary budget, mandatory spending—including entitlements—continues its growth nearly unabated. Without any changes, mandatory spending, including net interest, will consume three-fourths of the budget in just one decade.
Obamacare will add $1.8 trillion to federal health care spending by 2023. By 2015, health care spending will overtake Social Security as the largest budget item, including Obamacare’s coverage expansion provisions: a massive expansion of Medicaid and subsidies for the new health insurance exchanges.
If Washington doesn’t stop postponing reform, we could soon find ourselves teetering on the edge of a Greece-style meltdown. To forestall such an eventuality, lawmakers should eliminate waste, duplication, and inappropriate spending; privatize functions better left to the private sector; and leave areas best managed on the local level to states and localities. They should change the entitlement programs so that they become more affordable and help those with the greatest needs. Congress should also fully fund national defense—the first core constitutional function of government.
It is not too late to solve the impending spending and debt crisis, but the clock is ticking.
Empower the states and the private sector. Since the beginning of the 20th century, the federal government’s domestic activities have expanded well beyond what the Founders envisioned, leading to ever more centralized government, smothering the creativity of states and localities, and pushing federal spending to its current unsustainable levels. Even when Washington allows states to administer the programs, it taxes families, subtracts a hefty administrative cost, and sends the remaining revenues back to state and local governments with specific rules dictating how they may and may not spend the money.
Instead of performing many functions poorly, Congress should focus on the limited set of functions intrinsic to the federal government’s responsibilities. Most highway, education, justice, and economic development programs should be devolved to state and local governments, which have the flexibility to tailor local programs to local needs. Government ownership of business also crowds out private companies and encourages protected entities to take unnecessary risks. After promising profits, government-owned businesses frequently lose billions of dollars, leaving taxpayers to foot the bill. Any government function that can also be found in the yellow pages may be a candidate for privatization.
Reform the federal budget process. The federal budget’s focus on just 10 years ahead diverts lawmakers from dealing with the mounting long-term challenges, such as retirement programs. Likewise, the lack of firm budget controls and enforcement procedures makes fiscal discipline very difficult. Reforming the budget process is therefore an implicit part of reforming the budget itself. Congress should estimate and publish the projected cost over 75 years of any proposed policy or funding level for each significant federal program. Any major policy change should also be scored over this long-term horizon. In addition to calculating the costs of proposed congressional actions without regard to the economy’s response to those actions (known as “static” scoring), the government should require a parallel calculation that takes that response into account (known as “dynamic” scoring) to make more practical and useful fiscal information available to Congress when it decides whether to pursue certain actions.
Although Congress must make substantial cuts in current and future spending, it must not compromise its first constitutional responsibility: to ensure that national defense is fully funded to protect America and its interests at home and around the globe.
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