Debt Digest | Impoundment May Be Back on the Table
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
OMB official signals impoundment is on the table. Politico’s Jennifer Scholtes and Katherine Tully-McManus report that an Office of Management and Budget (OMB) official indicated that President Trump may impound congressionally appropriated funds if lawmakers don’t enact necessary spending cuts. They write: “[Sen. Rand Paul (R-KY)] predicted that Trump’s ultimate objective is to get the nation’s highest court to rule that the 51-year-old impoundment law is unconstitutional.” Robert A. Levy, a former chairman of the board of directors at the Cato Institute, explains: “Most likely, the impoundment issue will be re-litigated. The court will have to consider, first, the Constitution’s Appropriations Clause, which sets a ceiling (but not a floor) on federal spending. [...] That provision will be informed by separation of powers concerns and the president’s duty to faithfully execute the laws.” The OMB official warning comes after OMB removed its apportionments website in March. As Boccia and Dominik Lett have noted, this move undermined transparency and “could pave the way for executive actions that bypass congressional intent on spending decisions.” Since then, several groups have urged the reinstatement of the site, and the Government Accountability Office says the removal violates federal statutes. As Boccia and Lett have argued, instead of letting the executive make key spending decisions—especially through a risky tool like impoundment—Congress should take the lead and enact the necessary spending cuts itself.
Why DOGE failed. Reason’s Eric Boehm asked budget policy experts why the Department of Government Efficiency (DOGE) failed to deliver the promised $2 trillion in cuts. Here’s what Boccia had to say: “‘Elon Musk had good intentions but failed by misunderstanding that large-scale federal government reform is not a prerogative of the executive.’ [...] Instead of trying to do everything through the executive branch, DOGE could have put together a package of budget cuts for Congress to consider—like the one that Sen. Rand Paul (R–KY.) asked Musk to assemble. ‘In an attempt to act unilaterally, DOGE limited itself in scope and sabotaged its own chances of success.’” Cato’s Ryan Bourne also weighed in: “‘Cancelling non-priority grants and laying off workers only gets you so far, given the federal government primarily funnels money from some to others.’” Boehm highlighted another important factor—DOGE never asked for help from the budget experts who have spent years identifying prudent spending reforms. Boccia previously posted about this on X (and garnered 500K+ views).
End the IRA subsidies now. Cato’s Adam Michel and Joshua Loucks highlight the drag of the Inflation Reduction Act’s (IRA) energy subsidies on the federal budget—$4.7 trillion over 25 years. They argue that the House’s tax bill only modestly addresses this issue, repealing some credits immediately while phasing out others more slowly (the bill leaves some subsidies untouched and even expands others). They warn: “Allowing the most expensive subsidies to linger for another half-decade or more invites a rush to cash in before they expire, worsening malinvestment and strengthening the special interests that will push to revive them under the next administration. Full, retroactive repeal of the IRA is the only way to end the cycle of failed green industrial policy that builds uncompetitive industries on the shaky foundation of federal tax credits.” They point to the Energy Freedom Act by Reps. Mike Lee (R-UT), Josh Brecheen (R-OK), and Chip Roy (R-TX) as a better alternative that would terminate the IRA subsidies this year.
Tax cuts won’t fix the tariff damage. Mercatus Center’s Veronique de Rugy and Jack Salmon warn that the pro-growth effects of extending the 2017 tax cuts will be dampened by rising debt and interest costs, which crowd out private investment. “Based on the economic literature, CBO assumes that every $1 increase in the budget deficit reduces private investment by 33 cents,” they write, adding that CBO’s projections are overly optimistic as it underestimates how much debt drives up interest rates. Then there is Trump’s trade war: “Even under rosy assumptions, the tax cut extension’s benefit is only a fraction of the tariff cost. We’d still be down about 2% of GDP before considering the additional headwind of rising interest rates from the debt load,” they note. As de Rugy and Salmon conclude: “[T]he expiring TCJA provisions should be renewed, avoiding a tax hike for millions of American workers and businesses. But we also recognize the need to fund at least most of the cost of renewal through a combination of reducing spending and closing loopholes.”
Rising debt is already crowding out private investment. Random Walk’s Moses Sternstein shows how government debt crowds out private borrowing (see chart below). He explains: “The reason that total debt has stayed about average, while government debt has ballooned, is because private borrowers have borrowed correspondingly less (because higher rates have made it prohibitively costly to do so). [...] Public borrowing has never been higher [...] While private borrowing has never been lower [...]. ” As Boccia has written before: “Excessive deficits and debt raise interest rates and crowd out private investments, making it harder for Americans to secure mortgages and car loans and for businesses to secure financing to innovate and expand.”
