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J.D. Tuccille: America running headlong into a debt crisis

Americans will soon have to grapple with their government’s addiction to spending beyond its means

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Amidst much justifiable discussion and hand-wringing over tariffs, immigration and whatever piece of the planet the Trump administration currently covets, a dry but extremely important governance issue often tends to get overlooked: the shambolic state of U.S. federal finances.

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For decades, the United States government has spent far more than it takes in, while frequently promising to spend less (under Republicans) or tax more (under Democrats) without ever managing to balance its books. The result has been a massive accumulation of debt that, left unaddressed, will likely crash the economy within decades.

J.D. Tuccille: America running headlong into a debt crisis Back to video

In the Congressional Budget Office’s (CBO) recent report, “The Budget and Economic Outlook: 2026 to 2036,” published earlier this month, the nonpartisan agency forecast a budget deficit of 5.8 per cent of gross domestic product in 2026 that grows to 6.7 per cent in 2036. Interest on existing federal debt alone is expected to equal 2.6 per cent of GDP this year.

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Paying interest will continue to be an expensive proposition in the CBO’s estimate because federal debt held by the public (excluding money owed by the government to itself) is expected to increase from 101 per cent of GDP this year to 120 per cent in 2036. The previous high was 106 per cent in 1946. In dollar terms, total federal debt is currently US$38.7 trillion (C$53 trillion).

That’s a lot of red ink. It’s also an optimistic view even by the CBO’s standards. That’s because the CBO is bound by law to work from certain unrealisticassumptions, including full funding of entitlement spending. To offset the sunny spin that it puts on federal finances, the CBO also periodically publishes alternative scenarios that attempt to more realistically forecast the future.

In 2023, for example, the CBO predicted that, “If, between 2023 and 2053, discretionary spending and revenues were at their 30-year historical averages as a percentage of GDP, then federal debt held by the public in 2053 would exceed 250 per cent of GDP.”

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That wasn’t the only scenario considered by the agency’s economists, but it’s sensible to wonder what would happen if matters were to continue as they have for the last several decades. In this case, the CBO found debt rising to a level it hasn’t really contemplated. “Assessing the economic effects of debt that exceeds 250 per cent of GDP would require CBO to re-evaluate the economic relationships in its current models,” the alternative scenarios report added.

That scenario squares with a 2023 projection by Mark J. Warshawsky, John Mantus and Gaobo Pang for the American Enterprise Institute (AEI). They predicted that “debt-to-GDP will be 135 per cent in 2032 and 268 per cent in 2052.” The consequences, they suggest, will be “a notable deterioration in consumer welfare … as interest rates, health-care spending and deficits increase in a vicious cycle and households increase savings to partially maintain rates of investment in the economy even as federal debt crowds it out.”

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In 2022, the Committee for a Responsible Federal Budget (CRFB) warned that the dire results wouldn’t necessarily be confined to the United States. Its analysis noted that, “High and rising debt could even spur a fiscal crisis. In this case, loss of market confidence could quickly drive up interest rates or inflation expectations, devaluing existing bonds and causing severe global financial disruptions.”

The turning point will come, according to the Penn Wharton Budget Model’s Jagadeesh Gokhale and Kent Smetters, when U.S. government promises to pay its debts lose credibility. As of 2023, they believed federal officials had no more than 20 years to fix the country’s finances, “after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation).”

But that was their “best case” scenario, “under markets conditions where participants believe that corrective fiscal actions will happen ahead of time.” If investors around the world grow skeptical more quickly, “debt dynamics would make the time window for corrective action even shorter.”

And unlike the CBO, Gokhale and Smetters were willing to contemplate the effects of high levels of debt relative to GDP. They believe “a maximum debt-GDP ratio of 200 per cent can be sustained,” but that “a more plausible value is closer to 175 per cent.” Beyond that point, credibility would disappear as people around the world grimly accepted that the U.S. government had become unable to meet its obligations. Then the fiscal crisis and deterioration in welfare feared by analysts at AEI and CRFB would set in.

Like a character in Ernest Hemingway’s novel “The Sun Also Rises,” the U.S. government has gone bankrupt “gradually and then suddenly.” It spent beyond its means for years, and then (like many governments) ran up massive amounts of debt during the pandemic, trying to prop up the economy it had frozen. That limits options for future policy as the country pays for its past profligacy.

Also limited are paths away from the road to ruin. Some people want to raise taxes to meet their desired levels of spending. But those same people almost always want an even more generous state. Republican Sen. Chuck Grassley pointed out in 2011 that, “Congress now spends $1.68 for every dollar it collects through taxes,” and the problem has only worsened since then.

Hiking taxes not only encourages even wilder spending, it also burdens the economy. The CBO estimates that, “The economic cost of a dollar of tax revenue range from 20 cents to 60 cents over and above the revenue raised.” And that’s assuming revenue can be effectively increased.

The economist W. Kurt Hauser wrote over 30 years ago that, “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5 per cent of GDP” — a statement that appears to have held true ever since, based on Federal Reserve Bank of St. Louis data. Individuals and businesses seem to adapt to shifting laws, imposing an effective cap on what the government can collect.

That means the U.S. federal government will have to spend less because it has more control over the money that goes out than it does over what comes in. The longer it waits to exercise restraint, the fewer resources will be available for current projects relative to what’s required to pay down the accumulated debt.

So, while there’s plenty to debate about what Washington does right and (mostly) wrong, Americans will soon have to grapple with the government’s addiction to spending beyond its means.

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