Congress Agrees on Public Debt Ceiling to Reduce Deficit by $1.5 Trillion, But More Reforms Needed

An inflection, but not a remedy: the agreement sealed in Congress on the public debt ceiling should reduce the public deficit by 1.5 trillion dollars over the period 2023-2033, calculated the Congressional Budget Office (CBO), the non-partisan body that screens all bills presented. This represents, for comparison, the level of the budget deficit that should be observed this year.

“What we have just seen – bipartisan votes in both houses of Congress to begin addressing our fiscal health – is a rare budgeting victory, one that we hope to see more often,” Maya said. McGuineas, the president of the CRFB, a renowned public finance think tank. She now pleads for the creation of a bipartisan tax commission, which would mix parliamentarians and the White House to lay out all the avenues of reform still possible.

Public finances are, in fact, not in their best shape. According to latest forecast of the CBO released last month, federal revenues are expected to cover only three-quarters of spending next year. In relation to GDP, the public deficit should represent 6% of national wealth in the 2024 financial year, and 6.9% in 2033. Far from the average of the last fifty years (-3.6%). Most of the widening would be the consequence of the rise in interest rates, with a monetary policy that has tightened to temper inflation.

Load distribution

The federal public debt, for its part, would be as large as national wealth in 2024 (100.4% of GDP), and would soar to 119% of GDP by 2033, according to these forecasts. A scenario that could even deteriorate, anticipates the CRFB, if growth is not there or if tax measures, with a statutorily limited lifespan, are renewed by Congress in the coming years.

One of the great parliamentary battles to come will therefore probably be the future of the tax measures taken by the Trump administration, which notably reduced the corporate tax rate from 28 to 21%. Measures that are normally due to expire at the end of 2025. If extended, they would add approximately 350 billion dollars in annual budget deficit by 2027, the CBO has calculated. That is 15% to 20% more than the level planned without extending the system.

The question of the distribution of tax between households and businesses could thus be put on the table during the electoral campaign which begins with a view to the presidential and legislative elections at the end of 2024. According to the CBO projections, the weight of tax revenues in relation to GDP collected from companies is stable compared to the average of the last fifty years, but that of taxes paid by households has increased. And the gap is expected to widen further over the next ten years.

On the expenditure side, the widening of the deficit is largely linked, demographically, to the increase in compulsory expenditure on social security (retirement allowances in particular) and health insurance (Medicare for those over 65 and Medicaid for more modest). Conversely, the share of “discretionary” spending in relation to GDP has fallen, particularly in defence.