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The Congressional Budget Office projects that “if current laws governing revenues and spending generally remained unchanged, the federal budget deficit would increase significantly in relation to gross domestic product over the next 30 years, driving up federal debt … from 99% of GDP in 2024 to 166% of GDP in 2054—exceeding any previously recorded level.”
The remedy for a budget deficit and debt for a nation, firm or household is to reduce expenses, increase income or some combination of both. Though—unlike states, firms and households—the federal government has an outsized ability to borrow because it can ultimately print up the money to cover its debts. But this is an obvious road to ruin.
Republican leaders propose to reduce the size of the federal deficit and debt by reducing waste, fraud and abuse as well as increasing tax revenue by increasing economic growth through reducing unproductive regulations and selectively lowering taxes.
Democratic leaders propose reducing the federal deficit and debt by raising taxes on the rich and increasing economic growth through expanding public works and government-directed social spending.
However, before one examines the merits and flaws of these approaches, it is helpful to examine the federal budget in more detail. Recently, the CBO issued a report detailing current and projected details of the federal budget. In 2024, the feds collected $5.037 trillion but spent $6.828 trillion, running a deficit of $1.791 trillion. The deficit financed 26% of federal spending and was more than 6% of GDP. The CBO projections for the next 10 years show little deviation from this path under current law.
Federal entitlement spending to people (think Social Security), plus transfers to state and local governments, plus federal interest payments came to $5.237 trillion. In other words, if the federal government eliminated all spending on national defense and other federal activities not listed above, such as national parks, border patrol and environmental protection, it would still run a deficit of $200 billion. We don’t see how the federal government can reduce spending or increase revenue without inflicting hardship on many people.
The bottom line is that while some combination of the approaches offered by both sides of the aisle likely have some merit, we should beware. Politicians of all persuasions are prone to provide simplistic solutions best described as magical thinking. There are no easy solutions, just tough trade-offs.•
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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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