Debt Digest | The US Debt Crisis is a Global Problem
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts:
The WSJ’s Richard Rubin quotes me on the FY24 deficit. The Congressional Budget Office (CBO) estimates that the federal budget deficit in fiscal year 2024 was $1.8 trillion. Richard Rubin, the US tax policy reporter for The Wall Street Journal, writes: “The latest deficit reading is about 6.4% of gross domestic product. The U.S. has run larger budget deficits before, both in dollars and as a share of GDP. But the country set those records during wars, economic crises and the coronavirus pandemic, not during a period like today’s low unemployment and solid growth.“ Rubin’s article includes this key quote by me: “Congress has missed opportunities to act and should move soon to make Medicare more efficient and make Social Security benefits less generous than projected, said Romina Boccia, director of budget and entitlement policy at the Cato Institute, which favors smaller government. ‘Any fiscal plan that doesn’t address these programs is basically not addressing the root cause of higher spending,’ she said.” For context, tax revenues increased by 11 percent compared to last fiscal year, while Social Security spending grew by 8 percent and Medicare by 9 percent. Notably, interest costs on the US public debt grew by 34 percent!
Without spending restraint, Americans could face European-style high taxes. A new policy analysis by Cato’s Adam Michel compares tax systems between Europe and the United States, showing that European governments collect more tax revenue as a share of GDP, with consumption taxes (VAT) comprising a significantly higher portion of their total revenues. According to Michel, “The adoption of VATs is closely associated with government growth because new revenue sources, especially when the cost of the tax is not transparent, tend to fuel new public expenditures and reduce pressure on spending reforms.” He also notes that the European middle class pays much higher taxes, compared to US earners: “An average single worker with no children in the EU countries faces an all-inclusive average tax rate of 47 percent. A similar worker in the United States faces a 32 percent tax rate and pays almost $12,000 less in taxes [see Figure 3].” Low and high-income taxpayers also face higher tax burdens in Europe than in the United States. Michel warns that failure to address unsustainable deficit spending threatens Americans with European-style high taxes: “When deficit financing can no longer sustain the illusion, Americans will have to face the reality that the only way to fund a big and growing government is with high taxes on the middle class.”
The WaPo’s Julie Zauzmer Weil quotes me on Social Security’s COLA increase. Julie Zauzmer Weil reports in the Washington Post that the 2025 Social Security cost-of-living adjustment (COLA) will be 2.5 percent, lower than in recent years of higher inflation. She quotes me: “‘A low cost-of-living adjustment means that seniors’ purchasing power wasn’t eroded as much as in previous years,’ said Romina Boccia, director of budget and entitlement policy at the libertarian Cato Institute. ‘People shouldn’t think of this as a bonus on top of their benefit, but rather as a necessary adjustment to make sure that their benefit is able to buy as many goods and services as previously.’” However, as I’ve covered before, Social Security’s COLA is based on an outdated Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI‑W), which overstates increases in the cost of living. Congress should adopt the chained CPI to calculate inflation adjustments, which reflects changes in costs for more Americans and factors in the substitution effect, where consumers opt for cheaper alternatives when the prices of certain goods increase. This change would save over $175 billion over 10 years while preserving the purchasing power of benefits. Notably, Congress adopted chained CPI to adjust tax brackets for inflation in 2017.
China’s over-indebtedness as a warning sign for the United States. Desmond Lachman from the American Enterprise Institute discusses China’s housing and credit market bubble, highlighting that between 2008 and 2020, credit to the Chinese non-financial private sector increased by 100 percent of GDP—larger than the credit expansion that preceded the Great Recession. Lachman argues there are indications that the bubble has already burst, as evidenced by large property developers defaulting on their loans and a significant drop in the value of new homes. He states that China’s over-indebtedness problem should serve as a wake-up call for the United States, where public debt levels are becoming increasingly unsustainable: “In our case, it could take the form of a dollar crisis or the return of the bond vigilantes as both foreign and domestic investors lose confidence in our political willingness to address our public finance problems.” As Dominik Lett and I’ve written before: “Should a bond yield surge be sudden, large, and unmitigated, this self-perpetuating cycle can quickly escalate into a fiscal crisis.”
The US debt crisis is a global problem. A recent Wall Street Journal article highlights International Monetary Fund (IMF) projections that global government debt could reach 100 percent of the annual output of the global economy by the end of the decade, and in an extreme scenario, it could hit 115 percent by 2026–while US government debt could reach 150 percent of GDP. The IMF also notes that uncertainties surrounding US budget policy affect other governments: “Increasingly, changes in the interest rates that governments pay are driven not by changes in their own circumstances, but by changes to the outlook for U.S. budget policy and the interest rates set by the Federal Reserve.”