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Gov’t Shutdown Friday? Congress Must Stop Kicking Debt Can down the Road

18 Jan 2018

Ryan Bourne

Fears are mounting that the current Congressional funding
impasse will lead to a government shutdown by Friday. So far three
continuing resolutions to fund the government have been passed
during fiscal year 2018. Now, the impending deadline is the focus
of horse-trading and negotiation, with many in Congress pushing for
yet higher spending.

President Donald Trump’s original
budget
last May proposed higher defense spending financed by
discretionary spending cuts elsewhere of $54 billion. House
Republicans followed up with a more modest proposal with cuts of $5
billion. Now though, there is talk that the two parties might
eventually agree to spending increases totaling over $200 billion over the next two
years, busting existing caps. At the moment details cannot be
agreed upon, and Democrats are trying to attach other issues to any
spending bill, driving talk of a shutdown. But eventually a
compromise will no doubt be reached.

The truth is any such agreement that does not cut spending would
be another example of Congress kicking the U.S.’ debt problem can
down the road. The Congressional Budget Office has already
projected that the federal deficit (spending beyond revenues) will
be $563 billion this year, or 2.8 percent of GDP. The Joint
Committee on Taxation believes tax cuts will add another $103.5
billion to that. But the real problem is not the $100 billion here
or the $100 billion there for this or that program, but the
long-term trajectory for the debt path as a proportion of GDP.

Rather than kicking the
can down the road with large spending increases or simply delaying
a deal with another resolution, Congress should spend much more
time considering options to bring the debt path under
control.

At 77 percent of GDP, the federal debt is already at its highest
level since 1950, and much higher than the 40 percent average seen
in the whole post-war period. Debt fell sustainably after the war
due to a combination of steep military spending cuts, robust growth
and high inflation. In contrast, now debt is projected to rise
exponentially, driven mainly by the interaction of entitlement
promises with an aging population.

Over the next ten years, the CBO projects debt held by the
public to rise to 91 percent of GDP, even before the tax cuts. By
2047, the CBO reckons it will rise further to around 150 percent
and show no signs of letting up. It’s worth noting that in this
analysis the tax burden was expected to rise naturally by around 2
percent of GDP, meaning all of this extra debt was driven by rising
spending.

Congress knows this is unsustainable and there are costs of
inaction. There is ample economic evidence that such high levels
of debt seem to be associated with substantially lower economic
growth. Add to that the fact that high debts increase the fiscal
risk associated with unforeseen events requiring drastic budget
cuts, and consider the intergenerational consequences of such
liabilities, and it’s no wonder most economists agree that getting
the debt-to-GDP ratio back on a downward path is a worthy
medium-term aim.

Yet Congress so far seems to have no plan nor ambition to do it.
In continuously delaying action, current members are making the job
of future Congresses that much harder.

To see why, suppose that the aim was to get the debt-to-GDP
ratio back down to the historic average of 40 percent of GDP by
2047. That would require spending cuts now and forever equivalent
to 3.1 percent of GDP, or about 15 percent of current federal
outlays. But to achieve that same aim starting in 10 years’ time
would require cuts then at 4.6 percent of GDP, or 20 percent of
total spending.

In the long-term the only realistic means of curbing this
burgeoning debt is entitlement reform. But given that President
Trump seems to have cooled on this idea and the politics around
entitlement reform are so difficult, substantial discretionary
spending cuts are needed to create the fiscal space for the coming
entitlement headwinds.

Congress sadly does not seem up to the challenge of re-thinking
the scope of the federal government. But thankfully my colleagues
at the Cato Institute are. This week, we published Downsizing Federal Government Spending, a
collection of essays on where spending cuts could be made, edited
by my colleague Chris Edwards.

Rather than kicking the can down the road with large spending
increases or simply delaying a deal with another resolution,
Congress should spend much more time considering these sorts of
options to bring the debt path under control.

Ryan Bourne
holds the R Evan Scharf Chair in the Public Understanding of
Economics at the Cato Institute.

Click here to view the full article which appeared in CATO Journal