People are uncomfortable with the debt ceiling fight. Many think this is a sign of unhealthy and poor financial management and they are right. However, they should get used to it. These budget fights will continue to become more frequent and more intense. Because no one wants to talk about budget constraints. The truth is that existing spending commitments are rapidly shrinking the portion of the budget that politicians have control over as their spending appetite grows.
People who believe that government is the solution to all problems always have ideas for new programs to finance. They want to prepare for the next pandemic or emergency by funding new government powers. They want the government to engineer an energy revolution and simultaneously pay off all outstanding student loans as well as all future enrollment. They also want the government to relieve parents of the financial burden of raising children, expand the military and fund every project in the book.
Lawmakers will likely succeed in passing some bills and take at least small steps toward funding some of these grand policy projects. But I wouldn’t count on ending any of them—and not just because government generally fails to meet its lofty goals. Rather, because these ambitious objectives must be financed mostly from the discretionary portion of the federal budget, which is melting away.
In fact, the discretionary budget is what pays for homeland security, most of the military, farm subsidies, education, and more. It is the only part of the budget legislators directly and regularly control. Currently, discretionary spending accounts for 30 percent of total spending. In 1970, it was 62 percent. Defense spending is about half of that and 14 percent of the total budget.
In contrast, the amount spent on non-discretionary programs such as Social Security, Medicare, and Medicaid has doubled as a share of total spending, from 31 percent of the budget in 1970 to about 62 percent in 2023.
Meanwhile, interest payments on the national debt are another fast-growing mandatory-spending component of the federal budget. Overall, mandatory spending and interest payments on entitlements are projected to consume more than 70 percent of the budget and more than 80 percent by 2040. Legislators have little say over such payments, even though they increasingly dominate budgets.
What’s more, many mandatory spending programs are growing faster than the economy and will therefore rely heavily on borrowing. Above and beyond the debt problems we may face, this reality has serious implications for politicians who believe they can finance new projects or expand existing projects with budgetary discretion. The budget turnip is bleeding fast.
So expect more intense budget fights. While discretionary spending is still growing in nominal terms, albeit at a slower pace, legislators will increasingly struggle with how to spend this ever-shrinking budget while overall spending simultaneously explodes. There will not be much room politically to raise discretionary spending from borrowed money. And with fewer dollars to approach, competition for each of them will become increasingly intense.
In that battle, it doesn’t matter whether, for example, defense is a legitimate function of the federal government while education should be funded at the state, local, and private levels—or whether some new program is really worthwhile. What matters is which party is in power and which politicians are positioned to allocate funds where they want to go.
Of course, with our debt and deficit growing, legislators will try to collect more taxes. If they succeed, the revenue mandate will be a drop in the bucket full of red ink. However, I predict that their efforts will fail.
A look at the data shows that regardless of the current regime’s federal tax rate, since 1940, collections have never exceeded 20 percent of GDP. That’s in part because politicians are pressured to return a lot of wealth to taxpayers through a tax code that includes provisions like the child tax credit and other deductions. Adding to the difficulty is that higher marginal tax rates slow the economy and ultimately limit tax collection opportunities as Americans make less money.
If you’re tired of debt ceiling fights, I’m sorry to report that they’re just the beginning of a long series of fights over financial management.
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