U.S. dances around debt ceiling

The major confrontation between United State President Joe Biden and the right-wing group of Republican members in Congress over raising the ceiling on the U.S. federal debt is more political theatre than a real effort to deal with the ongoing and growing budgetary deficits.

The fact that neither party wants to deal with this fundamental fiscal challenge and that both have so far been successful in avoiding doing so illustrates that Congress has achieved non-accountability on this file.

Running a deficit is not cost-free. The U.S. carries debt of close to $31 trillion and the forecast expenditure on interest for the current year is set at $395.5 Billion or 6.8 per cent of all federal outlays. That’s more than $100 billion more than the government expects to spend on veterans’ benefits and services and more than it will spend on elementary and secondary education, disaster relief, agriculture, science and space programs, foreign aid, and natural resources and environmental protection combined.

The Congressional Budget Office forecasts that interest costs will triple over the next decade, reaching $1.2 trillion by 2032. That will, in turn, put a squeeze on other government expenditures – unless Congress just increases the size of the annual deficit – which in turn will cause a further increase in interest costs. This is not just because of the additional borrowings outstanding but also due to perceived increased credit risks that lenders will require be compensated with higher rates.

So, Congress can continue to avoid the fundamental question as to how much debt the economy can support but only at the cost of ever higher average and total interest costs. Eventually they will have to face the question of limiting debt growth. The question of how much cutting of expenditures and/or increasing of revenues (taxes) will be necessary to rein in – if not eliminate – debt growth will eventually have to be answered.

Expenditure growth by government has been a virtual constant since the beginning in the 18th century.

Currently, three programs in particular, Social Security (public pensions), Medicare and defence account for 72 per cent of all federal expenditures. These three programs are equivalent to a subway’s “third rail” when it comes to the voters’ support.

So, assuming the sacred cows continue to be funded, and Congress then adds on net interest payments (eight per cent), that leaves only 20 per cent of the budget in which to find the necessary cuts in spending. Not easily done.

Beginning with Ronald Reagan (who implemented a range of tax rate reductions and eliminations) and continued by George Bush in 2001 and 2003, revenues were reduced by an estimated $488 billion annually.

Trump implemented further cuts in 2017 that had a $1.7 trillion impact over the decade ending in 2028.

Congress earned praise, especially from right-wing groups favouring smaller government and reduced taxes.

The problem, however, was that, while the tax cuts reduced revenues, they did not reduce expenditures. Put another way, American taxpayers had their cake in the form of tax cuts and got to eat it too with increasing expenditures on new programs such those addressing the pandemic and climate change.

Well, the cake has been eaten and bills continue to come due. Congress will need to raise taxes. While this may not be popular, increased revenues could make a substantial contribution to eliminating the deficit. Limiting the capital gains exemption, imposing a value-added tax such as the Canadian GST, and raising marginal rates on income over $2 million a year are three obvious targets.

The small cadre of ultra-rich billionaires (the Koch brothers were the leaders) who formulated a plan to reduce taxes 30 years ago argued that cutting off revenues would result in smaller government. They were wrong. It’s hard to imagine that a cadre of leftleaning billionaires would be wiling to labour for three decades to achieve a major tax increase, especially as the fiscal mess only gets worse each day.

So, what would motivate Congress to face the music and rein in spending and raise revenues?

Perhaps the only circumstance that will force discipline on Congress will be sky-rocketing interest rates and ballooning costs of servicing the accumulating debt caused by lack of confidence in the U.S. economy.