Debt Digest | Downgraded
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
Fitch Downgrades U.S. Debt. Fitch Ratings, one of three major credit rating agencies, downgraded the U.S. debt from AAA (the highest possible rating) to AA+, explaining: “The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance…” A ratings downgrade is intended to serve as a signal to markets that an issuer of bonds or other debt securities is less likely to repay interest or principal. In this case, the ratings downgrade is minor, from an “extremely strong capacity to meet financial commitments” to “very strong” capacity.
This is the second time in U.S.’ history that a major credit agency has downgraded the country’s debt. Standard & Poor’s downgraded the U.S. debt rating in 2011. Rates on 10-year Treasury bonds fell after the announcement. While past performance is not necessarily indicative of the future, it’s not clear that interest costs will necessarily rise as a result of the downgrade. The U.S. economy is relatively strong, despite the drag from high and rising government debt, and the U.S. dollar remains the pre-eminent global reserve currency. And yet, the long-term fiscal trajectory is abysmal with more than $100 trillion in deficits projected over the next 30 years as debt surges to an unprecedented 180 percent of gross domestic product (GDP).
Congress should address the largest spending growth drivers: major health insurance programs, especially Medicare, and Social Security. The U.S. budget is on an unsustainable path that threatens to undermine American prosperity. Following the inadequate debt limit deal struck this May, some members of Congress are eyeing the possibility of establishing a fiscal commission. A well-designed commission, modeled after the successful Base Realignment and Closure Commission (BRAC) can help Congress overcome political gridlock and signal to markets and credit rating agencies that U.S. legislators are committed to stabilizing the growth in the U.S. debt.
Federal debt is a national security threat. Senator Mike Braun (R-IN) introduced a resolution to recognize the national debt as a threat to national security. Unsustainable spending and debt have significant national security implications. As we’ve explained, “A dire fiscal crisis would erode the economic foundation of America’s strength, limiting U.S. capacity to defend its vital interests at home and abroad.”
Fiscal Fraud. The Heritage Foundation’s David Ditch explains one blatant way that Congress has been hiding deficit spending as part of the May debt limit deal: “Congress created a small fund for buying computers, then said the fund could spend up to $11 billion, and now is ‘cutting’ the $11 billion just a few weeks later…using the ‘savings’ on programs and bureaucracies — where there actually will be spending.” Former Heritage Foundation senior policy analyst Justin Bogie highlights other budget gimmicks the government uses to mask the true costs of legislation here. One example: changes in mandatory programs (CHIMPs). Most CHIMPs provide no real savings and facilitate discretionary spending increases. Boccia argues that CHIMPs which provide no real outlay savings should be prohibited.
Ban earmarks. Seven of the biggest anti-spending House Republicans secured nearly $123 million worth of earmarks. It seems that even so-called fiscal conservatives can’t resist the temptation to direct money toward their own electorate. As Boccia writes, “Earmarking contributes to excessive spending and is a distraction from more fundamental governing responsibilities, such as reining in deficit spending and conducting oversight of the executive branch. Instead of throwing earmarked money at their districts, lawmakers should cut unnecessary and wasteful spending and review government programs to ensure that federal funding meets the needs of their constituents.”
Concerns about the federal deficit fluctuate based on the party in control. Mercatus’s Charles Blahous writes, “Democrats worried aloud about deficits in the 2000s when they positioned themselves against President George W. Bush’s tax cuts. In 2009, it was Republicans who fretted about deficits because they disagreed with President Obama’s stimulus spending plan…These positional fluctuations aren’t mere hypocrisy—they do, in fact, represent a genuine shifting of perspective whenever power and responsibility shift.” All of Blahous’s 10 rules for how politics works are worth reading here.
Biden’s new student loan plan could cost nearly $500 billion. The Office of Management and Budget (OMB) released it’s “Mid-Session Review.” Federal spending is projected to be $242 billion lower than OMB forecasted in March. Most of the savings are the result of the Supreme Court striking down Biden’s student loan forgiveness plan. However, as American Enterprise Institute’s Nat Malkus explains, Biden’s so-called income-driven repayment plan could reverse those savings. Based on Congressional Budget Office and Penn Wharton estimates, the proposed repayment rule change could cost between $230 billion and $471 billion over 10 years.
Partial prescription rule saves $2.6 billion. American Action Forum’s Dan Goldbeck writes, “The most consequential rulemaking of the week was the DOJ rule…“to allow for the partial filling of prescriptions for schedule II controlled substances under certain conditions”…to limit the over-prescription of such medications as opioids. The agency estimates that this will result in $647 million in annual net savings (or $2.6 billion over a five-year window).” Since inauguration, Biden has passed 615 new regulatory rules at a cost of $396 billion and 228 million paperwork hours. For comparison, Trump passed 695 rules at a cost of $36.3 billion and 54 million paperwork hours.
Simplify the tax code. As Cato’s Chris Edwards argues, “Congress should cut tax rates and repeal loopholes, but it needs to make sure that it is repealing actual loopholes and moving toward a more neutral tax base.” Individual tax loopholes cost about $820 billion in 2023 (see the chart below illustrating total annual tax expenditures). One proposal: repeal the state and local tax deduction (SALT). The SALT deduction “biases taxpayers and policymakers toward favoring a bigger government…[repealing SALT] would simplify the tax code, end the incentive for state and local governments to expand, and generate revenues to cut federal tax rates for all taxpayers.”
