Here are this week’s reading links and fiscal facts:
Government shutdown demands are the costliest ever. In a new blog, The Committee for a Responsible Federal Budget reveals: “Some lawmakers have called for increasing federal health care spending by $1.5 trillion to permanently extend the expiring enhanced Affordable Care Act (ACA) subsidies and repeal the health care savings from the One Big Beautiful Bill Act (OBBBA) as part of a deal to open the government […] Including either the full $1.5 trillion package or the $350 billion to extend ACA subsidies would make the reopening bill by far the most expensive reopening ever enacted. To our knowledge, it would also be the most expensive reopening package ever considered.” As Cato’s Adam Michel writes, “Obamacare premium subsidies were sold as temporary relief but have instead produced fraud, phantom enrollees, and subsidies for wealthy taxpayers who don’t need them.” Boccia and Turman echo this sentiment: “If Republicans cave, they’ll own the cost, the additional debt, and become jointly responsible for this welfare-for-the-wealthy scheme.”
Federal share of domestic spending keeps climbing. Cato’s Chris Edwards reveals: “Bureau of Economic Analysis data show the federal government’s share of nondefense, noninterest spending—essentially domestic programs—has risen from less than 20% in 1929 to 40% in 1960 and now 66% in 2024 [See figure below]. Federal aid to states is included in the federal total, underscoring how Washington has steadily taken over responsibilities once handled at the state and local levels as well as expanding the overall scope of government involvement in social and economic affairs.” Edwards argues: “Equilibrium between the branches [...] is only one structural feature of the US Constitution. Every bit as important is the constitutional balance between federal and state power, and on that front, we have been out of equilibrium for a century as the federal government grabs ever more power from the states and the people.”
The power of the purse belongs to Congress, not the executive. Donald Kettl and Philip Joyce write: “When the government shutdown ends, Donald Trump will have succeeded in staging the single biggest expansion of presidential power in American history because of the single largest shift in the constitutional balance of powers ever.” They explain, “When the administration can both decide it can spend money from any budget account on anything it wants, AND that it does not have to spend money appropriated by Congress if it does not want to, there are no limits to the budgetary powers possessed by the president. This is exactly the kind of executive overreach that worried the founders.” While cuts to government spending are certainly welcome, “The Founders vested the power of the purse in Congress for a reason—no free people should trust one person with their treasury. [...] Shrinking government by executive decree risks trading short-term wins for long-term institutional decay,” Lett and Boccia emphasize.
A fragile debt structure—not just high debt—is raising the risk of a fiscal shock. Mercatus’ Jack Salmon explains: “Between June 24 and September 15, debt held by the public surged by $1.37 trillion—in a little over seven weeks. Since January, the Treasury had been using extraordinary measures, meaning that maturing debt could be refinanced but no new net debt could be issued.” Furthermore, “The short-term maturity profile of Treasury debt compounds the risk, exposing the budget to rollover shocks and rising rates. As deficits persist and interest obligations mount, the tradeoffs facing policymakers grow more severe.” Salmon concludes, “Unless lawmakers are willing to undertake genuine reforms to the largest and fastest-growing components of the budget, the federal government will remain locked in a cycle of crisis management, rising interest costs, and diminishing fiscal flexibility.”
189% is the estimated Debt-to-GDP ratio at which austerity is required. In a new NBER paper, the authors “introduce a new indicator of fiscal capacity—the ‘austerity threshold’: the debt-to-GDP level above which the government must raise fiscal surpluses to ensure debt safety. […] calibrated to the U.S., we estimate this threshold at 189%.” They continue, “spending cuts reduce inflation and allow low interest rates, while tax increases distort labor supply and raise inflation. Uncertainty over the austerity regime—spending cuts or tax increases—sharply lowers fiscal capacity. The expected austerity regime affects asset prices and macro-outcomes even when debt-to-GDP is well below the threshold.” Cato’s Ryan Bourne emphasizes the last point, “[The] sweep of literature implies that a debt-to-GDP level of around 80 percent seems to be a threshold beyond which debt is more harmful to growth. The United States is already above this threshold.”
