Coming into 2024, the current U.S. federal debt is roughly $34 trillion. That is over $100,000 of debt per person, and more importantly it is roughly 1.2 times as large as the nation's economic output. Near the end of 2023, this became a more prominent problem as the credit rating firm Moody’s lowered their evaluation of the federal debt from “stable” to “negative.”
At Scioto Analysis, we mostly spend our time talking about State and Local governments, which are not capable of financing anywhere near the same amount of debt as the federal government due to the ubiquity of balanced budget amendments. Still, the federal debt has big implications for lower forms of government.
Safety net programs like social security and Medicaid are extremely important federal programs that could be candidates for spending cuts should the political winds blow the right way. If these programs got diminished or went away, there would be massive gaps in the state safety net that state and local government could be saddled with.
According to the Committee for a Responsible Federal Budget’s Debt Fixer interactive tool, the federal government would need to reduce expenditures/raise taxes to generate over $6.7 trillion by 2034 in order to get the debt to GDP ratio back to 98%. Their interactive tool lets users select different policy options that have been analyzed by the Congressional Budget Office to see what certain changes would have on the overall budget (this was the inspiration for Scioto Analysis’ own State Budget Tool).
One takeaway I have from some time with this tool is that a balanced federal budget requires both tax increases and spending cuts. It sounds obvious to say, but once you start looking at these options more closely it becomes clear why this is politically an extremely difficult option.
Of all the options laid out by the CRFB, the most significant debt reduction policy is a wealth tax on the ultra wealthy. This would account for roughly $3.1 trillion in new revenue, less than half of the gap needed to reduce the debt to GDP ratio to 98% by 2034. Some other examples of tax policy are enacting a Value Added Tax ($2.9 trillion), increasing the corporate tax rate ($1.3 trillion), and taxing financial transactions ($1.1 trillion).
Looking at the spending side of the equation, we see that the three biggest options laid out are replacing the Affordable Care Act with state credits ($800 billion), limiting the growth of annual defense spending ($560 billion), and making Social Security benefits a flat amount ($530 billion).
Although it is theoretically possible to reduce the debt solely by increasing taxes, it is pretty clear that this is politically infeasible. If policymakers are serious about reducing the budget deficit, there is going to need to be a mix of budget cuts and tax increases.
Perhaps federal policymakers can learn from state and local governments at this moment. States almost universally are required to have balanced budgets, which means finding creative compromises. The drawback of requiring a balanced budget comes in periods of recession, where federal government intervention is often essential to preventing deep economic turmoil.
Although it is still unlikely that the current federal debt will result in a catastrophic economic collapse, this is still an extremely important issue. The day will eventually come where spending needs to get under control before the risk becomes too much bigger. The longer we wait before figuring the budget out, the more painful the change will be.