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A Federal Budget Plan to Avert a Debt Crisis

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A Federal Budget Plan to Avert a Debt Crisis

October 12, 2018

Annual budget deficits are projected to soon surpass $1 trillion, on their way to $2 trillion or even $3 trillion in 10 to 15 years. Social Security and Medicare face a combined $100 trillion cash deficit over the next 30 years, which would push the national debt to nearly 200% of the gross domestic product (GDP). At that point, interest on that debt would consume 40% of all tax revenues—or more, if interest rates rise. Unless reforms are enacted, global markets will, at some point, stop lending to the U.S. at plausible interest rates. When that event occurs, or even approaches, interest rates will soar, and the federal government will not be able to pay its bills, with dire consequences for the U.S. economy.

A debt crisis, in short, looms on the horizon.

There is a way to avert this debt crisis. However, lawmakers must act quickly to reform Social Security and Medicare, as every year 4 million more baby boomers retire into those programs, and the eventual cost of reform rises by trillions of dollars. This report presents a specific 30-year blueprint—each element of which is “scored” using data from the Congressional Budget Office (CBO)—to stabilize the national debt at 95% of GDP.

The fiscal consolidation in this report calls for some Social Security and Medicare benefits for upper-income recipients to be trimmed. Some taxes would rise. Spending on defense would continue to fall as a share of the economy. But antipoverty reforms would be limited to a slight reduction in the growth of Medicaid benefits, and domestic discretionary spending priorities would be largely protected.

Without reform, runaway deficits will all but guarantee a debt crisis that will profoundly damage the country’s economic and social order. There is still time to avoid that crisis, but it will require the nation’s fractious political leaders to leave their respective comfort zones and compromise.

Editor's note: This article is an excerpt from a new Manhattan Institute report, "A Comprehensive Federal Budget Plan to Avert a Debt Crisis," by Senior Fellow Brian Reidl. To read the full report, please click here.

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