Since the start of the new year, the bond market has been urging Congress to come to terms with America’s spiraling budget problems. Soon it might be demanding immediate action.
Long-term yields have hovered around 5%. If they stay there, the government’s inflation-adjusted cost of borrowing will likely exceed the economy’s rate of growth — meaning the debt ratio will rise even faster than currently projected and that bigger spending cuts or tax increases will be needed to rein it in. This is what “unsustainable” fiscal policy looks like.
Lawmakers haven’t even started talking about this problem, much less grappling with it realistically. The Congressional Budget Office has just updated its periodic assessment of “Options for Reducing the Deficit.” Studied alongside the latest estimates of required fiscal tightening, it suggests just how dire the country’s outlook is.
On current policies — optimistically assuming no extra spending, no new tax reductions, moderate bond yields and no economic setbacks — the debt will rise to nearly 120% of gross domestic product by 2035 and keep on rising thereafter. Stabilizing the debt ratio at its current level of roughly 100% of GDP would demand spending cuts and tax increases amounting to some $9 trillion over the next 10 years. Measured against that prospect, the CBO’s list of deficit-reduction choices offers no easy answers.
To illustrate, the government’s single biggest spending program, at about $1.5 trillion a year, is Social Security. Gradually raising the normal retirement age to 70 from 67 — a controversial reform, too much for many politicians — would reduce the program’s 10-year outlays by roughly $100 billion. Setting all Social Security payments from next year at $2,000 a month inflation-adjusted (equivalent to 150% of the federal poverty level) would be even more radical and is scarcely imaginable: Even this would save only about $300 billion between now and 2034.
What about taxes? The CBO estimates that a surtax of 2 percentage points on incomes above $100,000 ($200,000 for joint filers) would raise about $1 trillion over 10 years. Limiting itemized personal-tax deductions could plausibly raise some $2 trillion; eliminating them altogether would raise about $3.5 trillion. Yet these dramatic tax increases, combined with those improbable changes to Social Security, would get you only a little more than halfway to stabilizing the debt over the decade. Add a politically suicidal European-style value-added tax of 5%, raising another $2 trillion to $3 trillion (depending on the base), and you’re closer.
The point is straightforward: To get on top of the country’s daunting fiscal problem, everything must be on the table. To keep spending cuts feasibly modest, program by program, savings must be found in many different areas: Social Security, Medicare, Medicaid, defense and other discretionary categories. Revenue must likewise be examined from every angle: Limit personal-tax deductions, reform the corporate tax (preferably by raising the rate while shielding new investment), gradually trim tax subsidies for borrowing and for employment-based health insurance, raise the earnings ceiling for the payroll tax, start taxing carbon emissions, eliminate stepped-up basis at death for capital gains tax, and more.
The wider the net, the less disruptive each of these changes will need to be. Indeed — and here is the good news — many of these reforms would be valuable in their own right: If well designed, they could spur efficiency and support faster growth even as they help get public borrowing under control.
Bear in mind, Washington’s next big initiative seems likely to be in the opposite direction: Extending the expiring provisions of the 2017 Tax Cuts and Jobs Act could add another $5 trillion to cumulative deficits by 2034. Scott Bessent, President Donald Trump’s choice for Treasury secretary, said recently that extending the Tax Cuts and Jobs Act was a top priority. He needs to think again. At a minimum, lawmakers should ensure that any such extensions are paid for, so that the plan is revenue-neutral. Then, as a matter of urgency, they must turn their attention to stabilizing the debt. The longer the task is delayed, the harder it will get — and the bigger the risk that a financial-market panic will demand a far costlier reckoning.
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