America is once again marching toward a statutory debt ceiling standoff. In a familiar spectacle, lawmakers will clash, doomsday scenarios will be invoked, and a last-minute deal will likely stave off a self-inflicted crisis – all while sidestepping the root problem of runaway spending. My new research shows that the federal government’s capacity to issue debt safely has eroded since 2017. President Trump is right to believe that the debt ceiling should be raised to avoid additional unnecessary harm. But the President also has an incredible opportunity to use this moment to increase the nation’s credit rating and prove that we are a responsible borrower.
For decades, the U.S. government has relied on its financial flexibility to weather crises such as recessions, natural disasters, and threats to our national security. But this “fiscal space” – the gap between today’s debt levels and what credit markets consider unsustainable – has narrowed considerably. In 2017, marketable federal debt stood at about 73% of GDP, while the “fiscal limit” hovered around 147%. Today, debt is closer to 90% of GDP, with the limit barely changed at 150%, leaving a much smaller buffer.
This matters, because when nations run out of fiscal space, investor confidence can evaporate overnight. Interest rates spike, making it more expensive to finance public debt, and credit-rating agencies grow anxious about potential defaults or an uncertain future. Not long ago, the U.S. was downgraded by one major agency precisely because of political uncertainty and unsustainable spending.
Treasury should have maximum flexibility to manage borrowing without the theatrics of political brinkmanship. Protracted debt ceiling standoffs only add uncertainty for investors and can threaten our historically sterling credit rating. Yet we can’t simply lift the ceiling indefinitely while ignoring the causes of our ballooning deficits. The real problem is overspending.
My research shows that we can return to the healthier debt-capacity levels of 2017 through a balanced approach that pairs pro-growth reforms with modest spending restraint. Under a scenario where U.S. GDP growth reaches 3% by 2028, extending the expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA) can be offset by cutting about $100 to $140 billion in annual spending. Yes, that extension might add $300 to $500 billion in deficits each year, but faster economic growth and a reasonable trim in outlays could keep our debt on a manageable path.
In a $6.8 trillion budget, finding $100 to $140 billion in savings is hardly draconian at roughly 2% of federal spending. The new Department of Government Efficiency (DOGE), for instance, has already begun identifying duplicative programs and excess spending across agencies. Minor belt-tightening, spread across scores of programs, would show the bond markets that Washington is serious about living within its means.
And the payoff would be restoring America’s credit prowess. Treasury bonds remain the global benchmark for safety, so long as creditors trust that the U.S. will repay every dollar. If markets suspect our debt might spin out of control, investors will demand higher returns for that risk which can drive up rates for everyone, from small businesses to homebuyers. A fiscally disciplined Washington would reassure the world that the U.S. remains the safest of safe harbors.
Fixing this won’t be politically painless. But it’s far preferable to the alternative of lurching from one debt ceiling crisis to the next, undermining confidence in our governance, and pushing credit agencies to downgrade a nation that has long been the anchor of global finance. Reasonable spending reforms and pro-growth policies are entirely within our reach.
President Trump is right: the U.S. should stop treating the debt ceiling as a political football. Instead, Congress should grant Treasury the flexibility to manage debt effectively while also demonstrating a commitment to sustainable public finances. Stronger long-run growth, coupled with disciplined budgeting, will rebuild the fiscal space we lost. And that, in turn, will keep America’s credit rating second to none.
