The last few weeks I have been discussing the budget/debt ceiling debate and how it was resolved in the Fiscal Responsibility Act. Progress was made in controlling spending but it is just a start.  Much more needs to be done. Now the action turns to the House and Senate Appropriations Committees where specific sums of money will be allocated for each government agency for FY 2024. This process will be playing out over the next few months.

Looking ahead to the 2024 presidential election, our next president will likewise face some enormous fiscal challenges:

• Record debt levels. Debt held by the public is on track to reach 115% of GDP in 2033 from its current level of 100% of GDP today (see chart below).

  

• Growing interest costs. Not only is the national debt itself growing rapidly, but also interest payments on the debt are also growing rapidly because the Fed has been increasing interest rates to control inflation.  This, of course, makes the debt grow even faster (see chart below).

  

• Looming Trust Fund Insolvency. The highway trust fund, the Medicare Hospital Insurance trust fund, and the Social Security trust fund will all soon be depleted (see chart below).

  

• Major Expirations and the Risk of Costly Extensions. In October 2025 the recently enacted statuary caps on appropriations will expire.  By the end of 2025, major provisions in the Tax Cuts and Jobs Act of 2017 and the major expansion of the ACA health insurance subsidies will also expire (see chart below).  These expirations must be dealt with in a responsible manner.

  

The problem is that neither of the leading candidates for the presidential election in 2024,  President Biden nor former President Trump, have a serious commitment to fiscal responsibility.  For example, neither one is willing to rein in entitlement spending, the biggest driver of our rapidly exploding debt.

Conclusion.  There are many challenges facing the United States, all of which the new president, elected in 2024, will have to deal with.  One of these is our rapidly growing national debt.  Bringing the debt under control is an urgent problem.  Failure to do so puts the United States at great financial risk and therefore becomes a threat to democracy and freedom around the world.

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Last week I said that the new Fiscal Responsibility Act is a step forward in controlling annual spending deficits and, therefore, getting our national debt under control.  It does indeed slow down discretionary spending for the next two years and sets a lower spending baseline for the next decade.

But consider several ominous trends which are making the outlook worse:

• The Congressional Budget Office reports that the budget deficit for the first eight months of FY 2023 is $1.2 trillion, far more than last year at this time. CBO currently projects a deficit of $1.5 trillion for all of FY 2023 which appears to be very optimistic.

  

• The Committee for a Responsible Federal Budget reports that the budget deficit totaled $2.1 trillion over the past 12 months through May 2023. As can be seen from the chart below, this is because federal spending is growing rapidly while federal revenue is dropping.

  

• Inflation, tripped off by the $1.9 trillion American Rescue Plan in March 2021, is far from under control. The liberal economist, Larry Summers, estimates that the three-month Treasury Bill rate is likely to average 4% over the next ten years,  much higher than the 2.5% projection by the CBO.  Keep in mind that every 1% increase in short-term interest rates raises interest payments by $310 billion per year based on our current (but rapidly growing) debt of $31 trillion.

  

• At the present time, neither President Biden nor former President (and current candidate) Trump, are willing to support changes to the entitlement programs of Social Security and Medicare. Both need substantial changes to their finances to keep them sustainable for the future.  Social Security is conceptually easy (but not politically easy!) to fix (by raising the eligibility age and/or income caps) but Medicare is more expensive than SS and will need more dramatic changes.  Entitlement reform is an urgent matter and must soon be addressed by our national leaders.

Conclusion.  The recently passed Fiscal Responsibility Act is a plus but much more work needs to be done to put our growing national debt on a sustainable path.  The Wall Street Journal calls the need for federal spending restraint “the central issue of our time” and I totally agree!

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Congress has now passed, and President Biden has signed, the Fiscal Responsibility Act of 2023.  It suspends the debt limit until January 2025, after the next presidential election, as well as setting an overall budget for FY 2024, beginning on October 1, 2023.  According to the Congressional Budget Office (CBO), it will reduce deficit spending by $1.5 trillion over the next ten years, which is quite modest, given our very large and rapidly growing national debt of $31.4 trillion.

It is generally well understood that the entitlement programs of Social Security and Medicare are the biggest drivers of our exploding national debt.  Social Security needs some relatively modest tweaks (raising the eligibility age and/or income caps).  But Medicare’s future solvency is a much larger problem, which will have to be addressed soon.

Nevertheless, the just-enacted Fiscal Responsibility Act has several excellent features:

• It reduces non-defense discretionary spending from the 2023 level of $744 billion to $704 billion for 2024, although not quite to the 2022 level of $689 billion, see here and here.
• If the House and Senate fail to enact the required 12 appropriations bills for FY 2024 by the end of this calendar year, all discretionary accounts are subject to a 1% cut. In other words, a strong incentive is created for returning to “regular order” where spending amounts are debated and voted on by the various appropriations committees in both the House and Senate, rather than Congress passing an omnibus spending bill at the last minute.
• The important principle of work requirements for welfare programs is reinforced even though only small improvements are included in the new legislation.
• The fulcrum of the nation’s political mood appears to be moving to the right, on such major issues as spending, crime, the border, and parental rights. The Fiscal Responsibility Act, resulting from negotiations between President Biden and House Speaker McCarthy over the House Limit, Save, Grow Bill, establishes the Republican House as the prime mover of political change in the current highly polarized national environment.

Conclusion.  The new Fiscal Responsibility Act, passed by Congress and signed by President Biden, achieves only modest deficit reduction over the next ten years, but nevertheless is consistent with the somewhat conservative political mood of the American people and therefore could well lead to other valuable changes and improvements in national policy in the near future.

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