Debt Reduction Must Start Now
When it comes to the national debt, the alarm bells have been ringing for years. The latest Congressional Budget Office projections have made crystal-clear the consequences of neglecting to address it.
The US debt now clocks in at an outsized 98 percent of GDP—nearly the size of the whole US economy. Without a course correction, it will rise to a historic high of 118 percent of GDP in 2033, and nearly double the size of the economy—195 percent—in 2053.
Debt matters and we are in a fraught moment. An impasse over the debt ceiling—which limits the government’s ability to pay debts already incurred rather than new spending—is approaching between June and September.
But, while the debt ceiling is a dangerous and inappropriate tool to address the outsized challenge of the national debt and it should be lifted or suspended so our bills are paid, we cannot afford to ignore our current fiscal path’s long-term peril. The nation is drowning in an ever-rising sea of red ink, crippling our economy, and stifling our ability to address our national budget priorities because of rapidly rising interest payments on the debt. The twin threats of inflation and recession—propelled by the impact of the pandemic and the Russian invasion of Ukraine—have only sharpened the threat.
Congress must once and for all deal with the debt’s long-run trajectory and turn that trajectory around deliberately and responsibly. When they deal with the debt limit, our political leaders must also establish a bipartisan congressional commission with the strongest possible mandate for fiscal reform and debt reduction, to steadily reduce the US debt-to-GDP ratio to a more sustainable 70 percent.
This is not an unreasonable goal. The ratio was below 40 percent before the 2008 financial crisis and largely stayed below 70 percent up until 2012. Economists who have studied debt-to-GDP ratios found 77 percent is the level where debt starts suppressing growth. Bending the debt curve will be difficult, likely taking decades if we are to avoid deep recessions—but it is possible with resolve and determination.
Washington has long ignored calls for debt reduction but rising interest rates and real borrowing costs demand action. The rate on inflation-indexed 10-year treasury bonds has risen roughly 2.5% over the past year (from -1% to +1.5%). Thus, it is not only elevated inflation but the fact that investors are demanding a higher premium on U.S. Treasury debt which adds urgency to the national debt picture.
Servicing the debt, a multiplicative combination of soaring debt and rising rates, will rise from $739 billion in 2024 to $1.4 trillion, or 3.6 percent of GDP, in 2033, exceeding the defense budget. By 2053 it will reach 7.2 percent of GDP, surpassing Social Security (6.4 percent) and Medicare (5.5 percent) as a share of GDP. Dollars spent on interest payments will not be available to handle other important federal priorities, let alone future crises.
Moreover, higher federal debt will spur further interest-rate increases by using up lending capacity. This will make it harder for other levels of government and private firms to borrow and invest. High interest rates also make paying down debt—and soon—more important than ever; the longer we wait, the more we have to pay.
Returning the country to a sustainable debt-to-GDP ratio will require all the tools in our national kit. Fiscal responsibility means cutting spending where possible, avoiding stimulus at this time, and investing in programs that promote growth, such as infrastructure, education, and R&D.
With the Medicare and Social Security Trust Funds approaching insolvency in 2028 and 2035, respectively, fiscal responsibility includes reforming the healthcare system, one of the largest and fastest-growing areas of federal spending and saving Social Security. Among other steps, healthcare reform will entail incentivizing consumers to limit costs and providers to deliver the best results rather than simply the most services. Potential reforms to Social Security include broadening the payroll tax coverage to include higher-wage workers or fringe benefits, investing some of the trust fund in higher-yielding financial instruments, or removing work disincentives for retirees.
On the revenue side of the ledger, tax policy needs to be overhauled to increase revenues by broadening tax bases and eliminating preferential treatment. History shows this works. And we should focus on what is necessary for long-run growth: smart, streamlined regulation and a realistic plan for the transition to cleaner energy.
We should also reform our budget process. New programs should be fully paid for without using budget gimmicks. Congress should also complete the full annual appropriations process with a budget resolution and use the reconciliation process only for its intended purpose of deficit reduction.
It is easy to quickly generate debt but hard to remove it. Starting now is critical. Otherwise, it will be too late.
David L. Finkelstein is Chief Executive Officer and Chief Investment Officer at Annaly Capital Management. Joseph E. Kasputys is Chief Executive Officer of Economic Ventures. Both are Trustees and co-chairs of the Fiscal Health Committee at the Committee for Economic Development of The Conference Board.
