The U.S. government is running out of room on its balance sheet, and few in Congress seem to grasp how little breathing space remains. According to my latest estimates, the nation’s “fiscal space” – the gap between today’s debt and the level at which markets would begin to doubt our solvency – has shrunk to 61 percent of GDP, down from roughly 73 percent in 2017. That erosion stems from a pandemic spending splurge followed by a lurch of Biden era stimulus, both piled atop already unsustainable spending promises. Unless lawmakers reduce the growth of federal spending by at least $1.4 trillion over the next decade, they won’t even restore the fiscal space we enjoyed eight short years ago, during President Trump’s first term, let alone put the budget on a genuinely sustainable path.
For decades, economists have debated how much debt a rich country can safely shoulder. We know there is a fiscal limit beyond which the old trick of “waiting until tomorrow to cut spending” won’t work anymore. When that limit is approached, interest rates will spike, investors will flee, and deficits will explode in a vicious spiral. My research places that red line for the United States at around 150 percent of GDP. Sound distant? Consider that publicly held debt is already approaching 100 percent. At the pace projected by the Congressional Budget Office, we will begin to permanently erode fiscal space by 2029, exhausting it completely by the early-2050s. This is well within the planning horizon of anyone buying a 30year Treasury today.
Some shrug and point to Japan, whose government debt tops 200 percent of GDP. But Tokyo finances much of its borrowing domestically and pays dearly for its inertia with anemic growth. The United States is different. Our debt is the world’s benchmark safe asset precisely because investors believe Washington will tighten its belt before it jeopardizes that status. Lose that faith, and we lose the privilege of borrowing inexpensively.
The math behind the $1.4 trillion target is simple. If Congress and the Trump administration can nudge annual growth to 3 percent – by preserving the best parts of the 2017 tax law, cutting red tape, and reviving private investment – every extra dollar of GDP stretches the debt limit a bit higher. Yet growth alone cannot outrun spending that rises even faster. To claw back the 12 points of GDP in lost fiscal space, we must trim primary deficits by $140 billion yearly, starting now. That is hardly draconian in a budget that eclipsed $7 trillion last year, but it demands discipline that modern Washington rarely musters.
Critics will complain that cutting spending during uncertain economic times is reckless. They have it backward. Failing to rebuild fiscal space now leaves us unable to address future crises. The pandemic taught us that Washington will open the floodgates, and prudent policy demands we refill the reservoir between emergencies. Countries with room to maneuver will weather storms. Those that wait until markets force their hand face abrupt austerity that falls hardest on the poor.
To avoid that scenario, start with the federal health program that has become an ATM for states looking to pad their general fund: Medicaid. Created in 1965, Medicaid has grown faster than the economy in 45 of the past 59 years. The Affordable Care Act’s expansion to able-bodied adults ratcheted costs higher, squeezing out resources for the disabled and elderly who were the program’s original beneficiaries. Congress should cap the federal contribution, encourage work, and end the gimmick of “provider taxes” that let states launder federal dollars to state general funds while enriching insurance companies and hospitals.
Then there is the interest bill, already topping $950 billion and set to double within a decade. Every uptick in rates adds billions more to the debt. The best way to prevent that squeeze is to borrow less. House Republicans’ budget blueprint pairs pro-growth tax relief with $2 trillion in deficit reduction, which is a credible down payment. The Senate should meet the House, not cling to a business-as-usual baseline that speeds us toward insolvency.
If Congress fails to act now, interest costs alone will approach $3 trillion by 2045, devouring every dollar we currently spend on defense, veterans, education, and infrastructure combined. At that point, if not before, it will be the markets – not legislators – that will dictate terms, and the cuts will be neither gradual nor gentle.
Restoring fiscal space is the easy part. It buys us breathing room and signals to investors that the United States intends to remain the world’s most reliable borrower. But it is equally essential that we reshape the federal budget so future Congresses are not forced into perpetual crisis management. The longer we wait, the more dire the circumstances become. As any household with a maxed-out credit card knows, the time to curb spending is before the bank demands payment.
