It appears that the President and Congress have arrived at an agreement on raising our country’s debt limit and small spending reductions for the next two years. Pop the champagne! Celebrate this glorious achievement in our country’s history!
At least this fleeting victory will temporarily distract us from the long-term fiscal nightmare that lies ahead. Don’t look now, but the federal budget deficit has now doubled after receding to a mere $1,000,000,000,000 on a rolling 12-month basis last August.
The Social Security trustees tell us that the program will either need to raise taxes or reduce benefits starting in 2033 as the Social Security Trust Fund they are currently using to supplement tax revenue will be exhausted. The Medicare trustees tell us that it will essentially be insolvent in 2031, requiring additional tax revenue or reducing benefits.
Of course, the sooner we make changes to these programs to address their long-term structural issues the more incremental those changes can be. However, politicians are more interested in their success in the next election than ensuring the long-term stability of current federal programs they supposedly oversee.
Coupled with huge increases in spending that started during COVID, these challenges add up to a big problem. The Congressional Budget Office projects that the federal government will spend $20,000,000,000,000 more than we will likely receive over the next 10 years. That easily takes our national debt to over $50,000,000,000,000 within the next decade. If the average interest rate on the debt is 4%, then the federal government will be spending about $2,000,000,000,000 per year just on interest before funding any other federal program.
While there is plenty of political debate on whether this challenge should be overcome with higher taxes or less government spending, you would think it would be common sense to generally not outspend our income as a country. Alas, today’s politicians and most Americans have become desensitized to the risks of excessive debt. It has not caused a problem yet, so they think it will not cause any problems in the future.
Switzerland faced very similar budgetary circumstances in the early 1990s. Debt as a percentage of their economy was rising too rapidly to be sustainable. In 2001, 85% of voters approved a plan that required a balanced budget over each economic cycle. This allows flexibility for higher government spending when economically necessary, but with the discipline to “pay it back” by running budget surpluses with lower government spending when it is not needed.
Switzerland has been using this process for 20 budget years now. The results are very, very encouraging. By confining politicians’ promises for more government spending or lower taxes to the reality of a balanced budget, Switzerland has permitted continued debate on these two different approaches while protecting the long-term financial viability of their country.
Spending increases must be offset by either shifting government spending from other programs or increasing taxes. Tax reductions must be offset by either shifting other taxes or decreasing spending.
While it is certainly not too late for the United States to stop painting itself into a budgetary corner, the first step is to admit we collectively have a problem. And we are clearly not there yet. Instead, we have broken into political tribes where the primary objective is to blame the other tribe.
Hopefully leaders who care about the viability of the country we leave to our children and grandchildren, leaders who care more about sustainability than re-election prospects, and leaders with common budgetary sense will arise and lead us out of this debt-laden wilderness.
Until then, prepare yourself psychologically for more tribal feuding while we keep on painting ourselves into a corner.
Quote of the week: Cicero (55 BC): “The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt.”