The 2030s are crucial because, if present trends continue, the United States will begin running out of fiscal space by the end of the decade.
What does that mean? Think of debt as water inside a pot made of soft clay. The potter is the American workforce, and the government is pouring the water. The national debt is the total accumulation of water in the pot. The amount of room left in the pot is fiscal space.
Fiscal space is the difference between the government’s current level of debt and the maximum amount of debt it could take on before undermining confidence in its ability to pay it back. The government needs fiscal space so that it can manage events, such as major wars, recessions, pandemics or natural disasters, that might require an unexpected surge in borrowing.
The potter can make the pot larger by adding more clay and shaping the clay that is already there. That’s what economic growth does. For most of American history, the government has had plenty of fiscal space because the U.S. economy grew as the population expanded. If a crisis happened, the government could use up some of that fiscal space without having to worry about the pot overflowing.
Without rapid population growth, economic expansion has necessarily slowed. But the rate at which government spending is rising has not. In fact, the largest programs in the federal budget are designed such that spending on them automatically rises faster than the economy grows. The government, in other words, is pouring water into the pot faster than the potter can make it larger.
The goal, at minimum, should be to reduce the deficit as a percentage of gross domestic product to roughly the rate of economic growth. As it stands, the deficit is over twice as high as the rate of economic growth. One sensible deficit target with bipartisan support is 3 percent of GDP by 2030. With a slight boost to economic growth to go with it, that would roughly stabilize the debt-to-GDP ratio and preserve fiscal space.
Circumstances have changed since the dawn of this century. Economists talked then about a “savings glut” that was keeping interest rates low. Interest rates are the price of money. High savings meant a large supply of money available to be borrowed, and high supply keeps prices down.
It turns out that when governments act on that information by issuing enormous amounts of debt, as most rich countries have done, and new large private investment opportunities come along, such as artificial intelligence, the savings glut gets eaten up.
Budget reforms must be based primarily on spending constraints, not tax hikes. While some moderate tax increases could help reduce the deficit, it is not feasible to structure a tax system in which revenue grows faster than the economy every year, which is what would be necessary given current spending projections.
Even boosting revenue as a share of GDP to the highest levels in American history would close less than half of this year’s deficit, and such a large tax hike would destroy economic growth. No major tax proposal on its own, except perhaps a national value-added tax, comes anywhere near closing the deficit when the effect on economic growth is properly accounted for.
When government receives more revenue, politicians’ tendency is to spend it or refund it, not to pay down debt. That’s true no matter which party is in power. The great majority of the increase in the national debt since the last surplus, in 2001, has come from bipartisan legislation.
To be credible, fiscal reforms must have bipartisan buy-in. Bondholders will not treat reforms as serious if they believe they’ll be repealed when the other party retakes power, and they’ll price that risk into interest rates.
Other countries that have made successful fiscal reforms led with the spending side. They have done so under center-left and center-right governments. The U.S. will be no different.
Constraining spending will need to be primarily focused on entitlement programs. The rest of the federal budget is roughly balanced in the long run. Reforms will also need to involve a revival in fiscal federalism, where state governments reassert their proper constitutional role in funding public services. That will allow the federal government to refocus on its core purpose, national defense, instead of figuring out ways to pay ever-rising interest costs on ever-growing debt.
The U.S. is not doomed, dark though its current fiscal condition may appear. The economy continues to be resilient and dynamic, and even half a percentage point in higher economic growth would make the math easier. The trajectory of the debt is still in the government’s control. Washington just needs to act before the debt begins to spiral and fiscal space vanishes.
The 2030s are almost here. The challenges we know are coming will be hard enough, but the world surely faces unexpected challenges as well. Getting on a firmer footing now would help ensure that America continues to be free and prosperous into the future.
