Reckoning with Fiscal Reality
The unfolding fiscal crisis as Congress keeps delaying entitlement reforms
This is part 4 of 5 in our Annual Recap series. See here for parts one, two, and three.
The United States fiscal crisis is no longer a future problem—we are already living through the early stages of one. Debt service is crowding out investment, credit rating agencies are downgrading U.S. debt, and international institutions are issuing rare, direct warnings about the unsustainability of entitlement programs. Meanwhile, the President of the United States is putting pressure on the Federal Reserve to cut rates to create more fiscal breathing room as rising interest costs on US government debt are threatening to put the US budget in a fiscal straightjacket.
The U.S. fiscal crisis is unfolding not as a sudden collapse, but ‘gradually, then suddenly,’ as rising interest costs, slower growth, and shrinking fiscal space compound. The longer Congress delays entitlement reform, the narrower and more painful the eventually inevitable options become.
As we enter the final weeks of fiscal year 2025, the U.S. public debt continues its alarming upward trajectory, approaching $30 trillion ($37 trillion for the gross national debt, including federal ‘trust funds’). The Committee for a Responsible Federal Budget now projects public debt will reach 120 percent of GDP in the next 10 years, and that’s under optimistic assumptions (with all current tariffs remaining in effect, despite legal challenges).
US government debt will increasingly crowd out productivity-enhancing investments and entitlement transfers will increasingly burden younger generations with higher costs of living. America’s fiscal trajectory is on a course toward economic decline, weakening opportunity and limiting our resilience to crises.
The longer Congress delays entitlement reform, the steeper the climb toward fiscal sustainability becomes. Delay has serious cost implications as every dollar in additional debt adds to ballooning interest costs and every year of delay in reforming Social Security and Medicare – two key drivers of US debt growth – inflates those programs’ long-term spending burdens. Americans will pay for Congress’s unsustainable giveaways and reform cowardice—if not through higher taxes, then by means of inflation.
While this year offered several signs that the message is getting through, Congress nevertheless doubled down on tax cuts without sufficiently cutting spending, thus digging the fiscal hole deeper. And while the Department of Government Efficiency (DOGE), raised hopes for meaningful deficit reduction, the effort quickly fizzled—falling well short of the serious reforms the debt crisis demands.
Last December, I testified before the House Budget Committee on the potential role of a balanced budget amendment as a commitment device to restrain overspending. I emphasized the importance of structural fiscal rules—like the German, Swiss, and Swedish debt brakes—that help restrain deficit spending while preserving flexibility during downturns. My testimony highlighted research on how well-designed rules can provide a credible backstop to strengthen long-term fiscal discipline, when there is political will or need to budget within limited means. The trouble is, both political parties have moved further away from fixing the real drivers of unchecked spending growth rather than closer toward it. Talk of fiscal dominance where monetary policy serves fiscal ends, not due to the Fed losing its coveted independence, but as the inevitable result of mounting fiscal pressures is heating up with Mercatus’s David Beckworth warning:
“[U]ntil we confront the growing costs of Social Security, Medicare, and other structural drivers of the deficit, it will be difficult to avoid drifting into a regime of fiscal dominance — not because of a crisis, but because the math leaves us with no other way out.”
Credit markets are responding. The realization that the US political system may not prove capable of avoiding a debt-driven inflation spiral was a key driver of Moody’s officially stripping the United States of its last AAA credit rating in May 2025. Moody’s cited “a lack of political will to meaningfully address widening budget deficits” in its measured warning. This followed Fitch’s downgrade in 2023 and underscores that the debt crisis is not arriving all at once out of nowhere, but rather as a series of growing constraints—higher interest rates putting homeownership out of reach for many, investment crowd-out depressing future growth, thereby restraining opportunity and the earnings potential of younger workers, and reduced fiscal space hampering the US’s capacity to respond to crises such as pandemics, wars, and other disasters. The consequences of rising fiscal pressures gradually erode the nation’s economy, prosperity, and security. That’s not to say that the US will escape a more severe version of this debt crisis, but that we’re already seeing the signs of what’s ahead, before dropping off the fiscal cliff.
In 2023 and 2024, I was hopeful that momentum was building for Congress to empower an effective fiscal commission to put entitlement reform front and center and avert the worst of the debt crisis. But developments in recent months have lowered my expectations. Financial repression and fiscal dominance now seem more likely.
Two bright spots I’d be remiss not to mention were that 1) Congress pursued modest spending restraint in the July reconciliation bill, targeting Medicaid, food stamps, and green energy subsidies, and 2) Congress enacted the administration’s very small rescissions request. These could be starting points for more serious budget reforms in the near future, but will they?
The debt is no longer an abstract problem for tomorrow—it’s an active threat to today’s economy. America is already in the early stages of a fiscal crisis, one that tightens its grip with every year of delay. Congress must move now toward reforming Social Security and Medicare, because further delay isn’t just costly, it’s outright dangerous. The choice is whether to act with foresight—or allow a crisis to inflict more painful consequences on us.