Democrats and Republicans Are Both Deluded About the Nation’s Fiscal Outlook
The competing budgetary myths of Democrats and Republicans are two sides of the same coin. Both want to be seen as defenders of the middle class, and so they pledge to restrain deficits and debt without imposing any costs on families of average means. To hit spending and revenue targets, they contend that sacrifice is only required by less favored constituencies, although they differ on who should be on the receiving end of this concentrated fiscal pain.
The problem for both is that, with the budget outlook deteriorating rapidly, their tales are becoming more implausible by the day. Voters may not mind in the short run, but eventually, reality will catch up. At that point, it will become clear that both parties have been peddling wishful thinking instead of serious plans because a sustainable fiscal course correction will require new policies that affect large numbers of Americans.
Today’s prevailing Democratic line was given voice by President Biden in his State of the Union address. He downplayed the nation’s fiscal challenges and promised to make progress in resolving them by taxing the rich while protecting all other Americans. He explicitly ruled out cutting Social Security and Medicare and even proposed major new spending on a host of domestic priorities. He also pledged not to raise taxes on any household with an income below $400,000 annually.
For their part, the Republicans also want to be seen as protectors of the middle class, but with a different emphasis. In keeping with the party’s stance since the 1990s, they promise not to raise taxes at all, including on the rich, and even want to extend many tax cuts now scheduled to expire after 2025, some of which benefit the middle class. At the same time, many in the party also now want to adhere to the Democratic and Trump-era position that cuts to Social Security and Medicare benefits are unnecessary for closing the fiscal gap over the long term.
So, at the moment, one party says the problem can be corrected by taxing the rich, and the other says tax hikes are unnecessary because there is plenty to be saved by cutting spending outside of Social Security and Medicare.
The latest projections and accompanying analysis from the Congressional Budget Office (CBO) can be read as a detailed rebuttal to what both parties are telling voters.
According to CBO, the federal deficit in 2023 will be $1.4 trillion, or the equivalent of 5.4 percent of GDP. Over the following decade (2024 to 2033), the average annual deficit will be 6.1 percent of GDP. From 1962 to 2008, the average federal deficit was 2.1 percent of GDP. Next year, the government’s cumulative debt is expected to be larger than the GDP; by the end of 2033, it will have reached 118.2 percent of GDP. As recently as the end of 2008, cumulative federal debt stood at only 40 percent of GDP.
The forecast for the next three decades is even more startling. The average deficit over the ten-year period 2044 to 2053 is expected to be 10.2 percent of GDP, and by 2053 federal debt will reach 195 percent of GDP.
In 2050, CBO projects that combined federal spending on Social Security and Medicare will be the equivalent of 13.1 percent of GDP, up from 9.5 percent in 2020 and 6.0 percent in 1990. Meanwhile, federal revenue in 2050 is expected to equal 18.9 percent of GDP, 1.5 percentage points above the average level over the period 1962 to 2022.
Democrats want voters to believe they will be able to push through Congress an annual tax increase affecting only the very rich that will increase total revenue by approximately 4.0 percentage points of GDP each year, or perhaps even more. Meanwhile, while in control of both the House and Senate in 2021 and 2022, the party could only secure support for a tax increase that is less than a rounding error when compared to annual GDP.
Put another way, it is now safe for Democrats to claim the problem is easily solved by taxing the rich because, with the House under GOP control, the proposition won’t be tested. If the Democrats retake control of Congress in 2025, their story will change.
The emerging GOP budgetary strategy is, if anything, even more fanciful. In this Trumpian era, the party is clearly divided and confused about its direction, but there is an emerging line of thinking that emphasizes applying extreme populist impulses to tax and spending policy. In broad terms, that means extending the Trump tax cuts and protecting Social Security and Medicare while imposing completely unrealistic cuts everywhere else to claim balance in ten years.
One plan that attempts to flesh out what this approach to budget policy would mean in practice actually exposes the utter implausibility of it. Among other things, the plan—published by a new Trump-associated group—calls for cutting Medicaid spending by over $2 trillion over ten years and Affordable Care Act subsidies for enrolling in health insurance by another $0.6 trillion. CBO would be sure to note that these policies would push several million (and perhaps tens of millions) people out of health insurance coverage.
These cuts alone would be enough to sink the entire plan, but there is plenty else in it that rank-and-file Republicans would disavow if they were ever forced to actually vote on it, including deep reductions in appropriated spending for domestic programs and dangerous restraint of the defense budget at a time when U.S. global leadership is essential for defending Western security interests and values, and most especially democracy and freedom.
The vast gulf between what this plan involves, based as it is on the GOP’s prevailing rhetoric, and what elected Republicans would actually support if pressed indicates that House Speaker Kevin McCarthy will have a very weak hand when it comes time to pass an increase in the debt limit.
For Democrats, dispelling the myth that this problem can be solved solely by soaking the rich will pose a different, and perhaps more difficult, challenge, as there is some actual room for tax hikes focused on the well off. The problem is that the amounts involved are far below what Democrats are promising to voters, and also far harder to secure politically.
How the budget drama will unfold in coming years is anyone’s guess, but the picture is unlikely to improve on its own. CBO’s projections, while daunting, are not based on pessimistic assumptions. Indeed, it would not take much at this point—for instance, something like direct U.S. involvement in a military conflict—for the federal government’s fiscal position to spiral out of control. If that were to occur, the bill for years and years of procrastination and evasion will finally come due.