Federal Debt Trajectory Points Toward Economic, Political, Social Crisis
The Congressional Budget Office's deficit projections for the upcoming years indicate the situation is truly dire.
The most recent report from the Congressional Budget Office shows the federal deficit for the current fiscal year will be above $2 trillion, and the largest contributor to the increase beyond expectations is the increase in funding for foreign wars:
In CBO’s current projections, the deficit for 2024 is $0.4 trillion (or 27 percent) larger than it was in the agency’s February 2024 projections, and the cumulative deficit over the 2025–2034 period is larger by $2.1 trillion (or 10 percent). The largest contributor to the cumulative increase was the incorporation of recently enacted legislation into CBO’s baseline, which added $1.6 trillion to projected deficits. That legislation included emergency supplemental appropriations that provided $95 billion for aid to Ukraine, Israel, and countries in the Indo-Pacific region. By law, that funding continues in future years in CBO’s projections (with adjustments for inflation), boosting discretionary outlays by $0.9 trillion through 2034.
The 2024 deficit is more than double the 2019 shortfall, The Center Square reports.
It is possible to argue that the war spending will not be renewed in years to come, although Congress and presidents are very good at finding wars on which to spend taxpayer money (via both taxes and debt, of course).
Spending is on a trajectory to reach 24.9 percent of national output (GDP) by 2034 (see CBO graph below), with revenues coming in at 18 percent of GDP. The latter number may be overly optimisic, as federal tax revenues averaged 17.3 percent of GDP in the years 1974-2023 and I do not believe that the government has obtained any fairy dust that can increase that number for any appreciable length of time. It is a quite consistent limit.
My conclusion: there will be a sharp decrease in federal spending at some point in the next decade.
One scenario is that this occurs by choice, with Congress and a president making tough but completely justified decisions to pare back federal spending.
In the other scenario, both taxes and borrowing are sufficiently strained that the government cannot pay its bills and has to resort to a big increase in monetary inflation and/or runs into problems selling Treasury bonds to cover the deficit.
The inflation scenario would devalue the currency and thus decrease government spending as a percentage of real, inflation-adjusted GDP, while massively reapportioning all wealth, earnings, and government transfer payments and other spending because of the differing effects of inflation on those various sectors and the people and institutions within them. So maybe government spending would increase as a percentage of real, inflation-adjusted GDP by brutally forcing the latter down. Congress and the president at that time will not find either of these outcomes desirable, I should imagine.
The effects of this reapportionament would be somewhat unpredictable and chaotic, though what is fully predictable is that it would be very bad and long-lasting.
Alternatively, the inability to sell Treasury bonds at a decent interest rate would invert the yield curve massively, throw all markets into chaos, and crash the economy. That would bring on howls of pain and desperate demands that the federal government increase spending to stimulate the economy, which will be simply impossible and would not work even if they could fake up the money. An economic crash of this magnitude would cause an implosion of the federal government and a massive loss of any authority the latter has managed to retain to that point.
There is still time to start cutting spending, beginning in January 2025, just to pick a date out of the air, wink-wink. We should start by cutting spending to the 2019 level, which is quite doable without making massive cuts to Social Security benefits, the great scare story of all big-government spending addicts for the past several decades.
Cutting spending to the 2019 level would unleash rapid economic growth that would eliminate federal deficits in just a few years and enable the government in fact to start paying down that debt. That would be salvific for the well-being of the American people.