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The stories that matter on money and politics in the race for the White House
The writer is director of economic policy studies at the American Enterprise Institute
Donald Trump and Kamala Harris seem to agree that one of the nation’s most important challenges should remain unaddressed — a problem that has been slowly eroding the foundations of economic prosperity for decades.
That problem? The national debt.
The non-partisan Congressional Budget Office reports that federal debt held by the public averaged 48.3 per cent of GDP for the half century ending in 2023. The debt is currently far above its historic average. The CBO projects that next year, 2025, the national debt will be larger than annual economic output for the first time since the US military build-up in the second world war.
In 1946, the ratio of debt to annual GDP was 106.1 per cent. The CBO projects that the debt will top that amount in 2027 and will rise to 122.4 per cent in 2034. It is expected to be on a steady climb thereafter.
What’s driving this trajectory? The specifics of the US debt situation point to a clear culprit. By 2034, the CBO expects federal tax revenue to be 18 per cent of annual GDP — 70 basis points above its average over the past 50 years. At 24.9 per cent, federal outlays in 2034 are projected to be nearly 4 per cent of GDP above their historic average.
In other words, both tax revenue and government spending are projected to rise over the next 10 years, but spending is projected to rise at a much faster rate. The US has a spending problem, not a revenue problem.
More precisely, the US has three main spending problems: Social Security, Medicare and interest payments on the debt. Other government expenditure — such as on the military, education, law enforcement, disaster relief and national parks — is projected to fall. Strikingly, the budget office expects the US to spend more on interest payments than on national defence in 2024.
Of course, revenue reductions resulting from the 2017 Trump tax cuts have increased the size of the budget deficit and national debt. Tax cuts (generally) don’t pay for themselves. But increasing the level of tax revenue would not change the upward trajectory of future government spending.
According to the non-partisan Committee for a Responsible Federal Budget, repealing the Tax Cuts and Jobs Act of 2017 and increasing capital income taxes on high-income households would only lower the 2034 debt-to-GDP ratio by two percentage points (from 119 to 117 per cent). This additional tax revenue would lower the 2050 ratio from 160 to 157 per cent.
The first step to solve the budget problem is to acknowledge it. But at Harris and Trump’s presidential debate, the word “debt” was not mentioned once. Nor can it be found in the 2024 Republican party platform. Harris makes only passing references to debt and deficits in her campaign policy book, arguing that she compares favourably to Trump.
In fact, both candidates’ tax and spending plans would make the problem worse. Each firmly opposes Social Security and Medicare benefit reductions. The CRFB estimates that Trump’s and Harris’s policies would add $7.5tn and $3.5tn, respectively, to the debt from 2026 to 2035.
An unwillingness to properly address these difficulties is one of several unfortunate developments in America’s post-2016 populist turn. George W Bush’s tax and spending policies increased the budget deficit, but he made addressing the long-term problems in Social Security his top domestic priority in 2005. Barack Obama presided over large deficits, but he attempted to modestly slow the projected growth of Social Security benefits.
As is often discussed, growing national debt could trigger a fiscal crisis. But the absence of a fiscal crisis does not indicate that all is well. The US’s fiscal imbalance has been slowly eroding wages and incomes for decades.
Economists find that each one percentage point increase in the debt-to-GDP ratio increases longer-run real interest rates by one to six basis points. According to the CBO, private investment falls by 33 cents for every one-dollar increase in the budget deficit.
Less investment reduces the nation’s capital stock, making workers less productive, lowering their wages and reducing workforce participation. Over the decades, these effects accumulate. Moreover, the US is borrowing to finance current consumption, not to invest. Large budget deficits are sacrificing long-term growth and higher future living standards to support the spending of today’s middle-class retirees.
Rising debt also crowds out needed investments in defence and scientific research, as well as making it harder to expand economic opportunities for the working class, as Harris and Trump propose. The federal government already spends more on interest payments than on programmes that benefit children.
For good reasons, Trump and Harris are seen as vastly different candidates and their parties as trapped in gridlock. But if you define what government does based on how it spends taxpayer dollars, there is seemingly a strong consensus. According to my calculations, 78 per cent of the projected increase in total government spending from 2024 to 2034 will come from rising spending on Social Security, Medicare and interest payments on the debt — three items neither candidate or party wants to touch.
This bipartisan consensus is a threat to future prosperity.