Joint Economic Committee Chairman David Schweikert has sent House Budget Committee Chairman Jodey Arrington its latest Views and Estimates letter, outlining its economic evaluation of the Budget, its analysis of the programs driving Federal debt and deficits, and proposed solutions to achieve long-term growth.
The letter is required by the Congressional Budget Act of 1974 providing policy recommendations consistent with the goals of the Employment Act of 1946.
“There is great uncertainty about when and how the debt will switch from sustainable, business as-usual, to an unsustainable, market-unraveling nightmare,” writes Chairman Schweikert. “Every year we wait to change course increases leverage, and the higher the debt-to-GDP ratio the easier it is for bad headwinds—such as crisis spending or interest rate fragility—to lock us into a debt spiral. In short, allowing the debt burden to increase is a levered bet, and the downside risks are already enormous.”
The JEC finds the rising debt-to-GDP ratio is structurally unsustainable. Stabilizing debt will require large, early policy changes, and delay materially increases the risk of severe economic and financial consequences. To rein in and slow the growth of federal debt, the letter focuses on solutions that address healthcare spending, especially through Medicare Advantage reform, border adjustment tax policies, and skills-based immigration reform focused on recruiting and retaining individuals with high income potential and entrepreneurial, high-level skills who will contribute to the broader economy and support the United States in developing the next great innovations.
Key findings include:
- The high and rising U.S. Federal debt is a levered bet on stability, which can unravel in two ways. First, it is a bet on there being no crisis requiring substantial fiscal headroom in the upcoming decades, such as a significant military conflict or an economic calamity. Second, it is a bet on the future trajectory of interest rates relative to economic growth being favorable. If the winds blow favorably, the U.S. may be able to continue along its current fiscal path without major adjustments, with the debt-to-GDP ratio gradually rising to 130 percent in ten years by Treasury’s estimates. But already at today’s 100 percent debt-to-GDP ratio—and certainly at the forecasted 130 percent debt-to-GDP ratio—it is easy to imagine how the winds could blow unfavorably. If they do, the damage to the U.S. fiscal position and status as a world power could be catastrophic and irreversible.
- We should not discount the promise of greater economic growth, especially if pro-growth policies are enacted, of which there are many opportunities. P.L. 119-21 (H.R. 1 in the 119th Congress, commonly known as the Working Families Tax Cuts) contains many effective pro-growth tax provisions, and the administration has been working tirelessly to dismantle burdensome regulations. However, recent legislative proposals are insufficiently pro-growth. Policymakers should redirect focus to transparently pro-growth reforms.
- We strongly encourage policymakers to act now by adopting pro-growth, fiscally sound policies to stabilize the debt-to-GDP ratio. It is typically not feasible or ideal to cut spending abruptly, partly because doing so can depress the economy in the short run. By acting now, policymakers can bend the debt-to-GDP ratio trajectory so that in ten or twenty years it is stabilized, rather than continuing to escalate. We highlight reform proposals in Medicare, international taxation, and immigration. If adopted soon, these reforms would together yield about 40 percent of the needed fiscal adjustment to stabilize the debt-to-GDP ratio.