Fixing America’s Failing Fiscal Health

Another grim prognosis of the U.S. government’s fiscal health, made significantly worse by the COVID-19 pandemic, was recently offered by the Congressional Budget Office. With the national debt projected to exceed the size of the national economy next year, the United States will soon be deeper in debt than at any point in its history, including World War II and its aftermath. Just how concerned should we be?

The American public is understandably mystified, and even desensitized, about the country’s fiscal condition and the gravity of its ever-expanding debt. For years, policymakers have sent mixed signals about the importance of getting debt under control. At times, the prevailing concern warned of rapidly approaching fiscal cliffs and doom, while at other junctures consensus emerged around the notion that deficits don’t matter or at least shouldn’t be considered in times of crises. Those conflicting signals have blurred a clear-eyed appreciation of the nation’s fiscal plight.

A new report from the National Academy of Public Administration, “Building a Stronger Fiscal Foundation: An Agenda for 2021,” provides practical suggestions for how the next administration might engage on this important topic.

Catastrophic 21st century events like 9/11, Hurricane Katrina, the 2008 financial crisis, and the COVID-19 pandemic make one thing abundantly clear: Bad things happen unexpectedly. And when they do, federal spending can mitigate the social harm. Given the increasing incidence of such crises, the report recommends a more systematic and transparent recognition of risk-adjusted costs in the budget to ensure adequate planning for such eventualities.

The report questions whether it is equitable to pass the cost of pandemic relief on to future generations and recommends the imposition of a modest intergenerational debt relief surcharge. That idea takes the form of a small personal and corporate income surtax in 2020—less than 0.5%—that automatically and gradually increases as the infection rate of COVID-19 recedes. The modest revenue collected from the levy would not be a drag on the economy but would effectively commit the current generation to bearing at least some of the current relief costs.

The next administration is encouraged to adopt a four-year strategic financial plan to articulate a clear, mission-directed vision of the budget. A quadrennial approach would place more emphasis on program evaluation and reviews of big-ticket spending and tax items. It would also facilitate analytical emphasis on critical needs, consideration of longer-term funding needs and revenue sources, and the study of whether programs achieve intended objectives.

Cynics of fiscal reform (the “deficits don’t matter” crowd) point out that interest rates have been near historically low levels in recent years and, if debt was a real problem, it’d be revealed through higher borrowing costs. But any contemplation of the rates being demanded must consider that investors are staking a claim not just on current revenues but also on future taxes and the ability to collect additional funds if needed. Investors are willing to accept low rates given the overall economic power and taxing capacity of the United States and, to date, the size of the nation’s debt has been deemed manageable. But that assessment is subject to change.

The question becomes, at what point do U.S. fiscal imbalances become so severe that a tipping point is reached—when investors either refuse to buy Treasuries or demand significantly higher interest rates to reflect default risk? And what if the United States encounters additional tail-risk type events (another pandemic or financial crisis or a major cyber-attack) at some point in the years ahead?

While no one knows when the debt marketplace might shy away from lending to the United States, one thing is clear: it could happen quickly and the nation’s ability to respond effectively to such events shrinks as its fiscal condition weakens. Accordingly, given the fiscal outlook, the real question isn’t whether deficits matter, it’s whether gigantic deficits matter.

While policymakers, academics and budget wonks debate the economic and fiscal impacts of government debt, average Americans understand that borrowing is never free. It costs households and it costs the government. Borrowing like the United States does only makes sense if you think the nation will have more money in the future to pay it back.

Unfortunately, tax changes enacted in recent years weaken the ability of the United States to repay its debts because less money will be available in the future. Tax cuts might better be described as tax deferrals—someone will pay down the road, just not the generation benefiting now.

As was aptly pointed out in the report, the notion of conducting a grand fiscal and economic experiment—let’s borrow as much as we can ‘til we can borrow no more—sounds more like the reprise of a bad country music song than sound public policy. Clearly, an unprecedented health crisis like the one we’re living through now requires corresponding emergency action to help the nation weather the resulting economic fallout. But the next administration needs to realize the country’s fiscal condition was made significantly weaker by the pandemic and that a plan is desperately needed to strengthen the nation’s fiscal outlook and shore up our ability to respond to future crises.

Doug Criscitello, a former official with the U.S. Congressional Budget Office and the U.S. Office of Management and Budget, is a Managing Director with Grant Thornton Public Sector. He is a Fellow of the National Academy of Public Administration.