Republican Balanced-Budget Aim Clashes With Fiscal Realities

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(Bloomberg) -- Republican House Speaker Kevin McCarthy has declared his intent to put the US “on a path to a balanced budget” within 10 years, a goal that runs headlong into stark political and fiscal realities.

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With the nation’s debt load having more than doubled in 11 years, to over $31 trillion, it’s an idea that enjoys public support. But balancing the budget is practically impossible without touching Social Security and Medicare — which both parties made clear during President Joe Biden’s State of the Union speech they wouldn’t threaten — or raising taxes, former officials and economists warn.

The scale of the federal government’s budget challenges were displayed Wednesday when the nonpartisan Congressional Budget Office released new projections that forecast the 2023 budget deficit at $1.41 trillion — $426 billion worse than projected last May. Debt held by the public is expected to climb to $46 trillion by 2033, amounting to 118% of GDP — the highest in US history.

“I’d be the last person to say you can’t find savings from improved efficiency or the elimination of some programs,” said G. William Hoagland, senior vice president of the Bipartisan Policy Center in Washington and a former GOP congressional staffer. “But there’s no way on God’s green earth you’re going to balance the budget in 10 years unless you’re talking about increasing revenues and slowing the rate of growth in some of our major entitlement programs.”

Such programs make up nearly two-thirds of federal spending. The Committee for a Responsible Federal Budget cautioned last month that balancing the budget by 2032 while leaving Social Security and Medicare alone, and also not touching spending on defense and on veterans, would require an 85% slashing of so-called discretionary spending.

The CRFB, a centrist fiscal watchdog group, suggested setting a more realistic target, such as stabilizing debt relative to gross domestic product, or achieving a primary budget balance — excluding interest paid on the debt.

Economists generally agree the goal of balancing the budget — if taken literally — doesn’t make sense. It’s rare for major economies in modern history to run budgets in balance or in surplus, with the US only seeing that in the 1998-2001 period, when stock-market gains had helped yield big capital-gains revenue.

“As an economist, strictly speaking, the budget doesn’t have to be entirely balanced,” said Stephen Stanley, chief economist at Santander US Capital Markets. “You want to have, especially in good times, a stable or declining debt-to-GDP ratio. And the traditional way to think about this is across the span of an economic cycle.”

In other words, it’s fine to run a deficit as long as, over the longer term, the economy grows at a faster pace than the debt. That’s the metric Federal Reserve Chair Jerome Powell has long described as the key gauge of sustainability.

Over the past 15 years, however, US debt has grown a lot faster than GDP.

Just before the Global Financial Crisis, federal debt held by the public stood at 35% of GDP. Last year, it reached an estimated 102%, according to the White House Office of Management and Budget.

What’s making the debt load all the more alarming to economists now is that interest rates have surged. Until recently, historically low rates meant the government’s interest payments as a percentage of GDP averaged just 1.4% from 2009 through 2022, OMB data show.

Current rates on Treasury securities are much higher, causing the deficit to deteriorate even further as the government spends more to borrow.

In its latest projections, the CBO estimated that, if current laws remained unchanged, the increase in net interest payments will far outpace the rate of growth over the next decade. Net interest outlays would rise in that scenario from $739 billion in 2024 to $1.4 trillion in 2033, reaching 3.6% of GDP.

That outlook will fuel Republicans’ calls for addressing the budget deficit. They’ve even sought to make budget cuts a condition for raising the federal debt limit, which became binding on the Treasury last month.

They’ve also refused to consider tax increases. Indeed, they’ve proposed extending former President Donald Trump’s tax cuts that expire in 2025, which the CBO has estimated would cost nearly $3 trillion by 2032.

Biden and congressional Democrats reject any conditions for raising the debt ceiling, and have called on Republicans to spell out how they would achieve a balanced budget.

While GOP members of the House Budget Committee have floated some specific proposals, those stop short of getting the budget back to balance.

Read More: House Republicans Offer Cuts They’d Back in Deal for Debt Limit

Meantime, Treasury Secretary Janet Yellen has stuck by her long-standing view that the costs to finance US debt are still on a sustainable path.

“The idea that we’re in reasonable fiscal shape did not hinge on the idea that interest rates will always stay at zero forever,” she told Bloomberg News in a Jan. 27 interview.

She also sees the current run of higher rates easing once this bout of inflation is over.

Other economists, from across the political spectrum, disagree.

“I am far less concerned about the level of debt than I am about the trajectory,” said Wendy Edelberg, director of the Brookings Institution’s Hamilton Project on economic policy and a former chief economist at the CBO. “Looking at what the projections are under current law, things can’t keep going the way they’re going.”

What’s really lacking, Edelberg said, are not ideas for what will set the long-term budget outlook right, but political compromise.

“We have fundamental disagreements in this country over what we value in our federal government,” she said. “These are not, at the end of the day, problems for technocrats or even economists to solve. These are political.”

(UPdates with new CBO projections in third paragraph and first paragraph before final chart.)

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