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Unruly politicians and unchecked spending risk US debt catastrophe

The writer is director of economic policy studies at the American Enterprise Institute

The US is set to breach its borrowing limit as early as next week, yet Republicans and Democrats have not secured a deal to increase the debt ceiling and avoid an economic and financial catastrophe.

The nation has arrived at the brink of disaster because of a collision of structural problems in the economy and political system. A deal to increase the debt ceiling and cut certain categories of federal spending would fix the immediate crisis, but would not address these festering problems.

What are they? Start with the economics. There is no doubt that the national debt is on an unsustainable trajectory. The non-partisan Congressional Budget Office projects that federal debt held by the public will grow as a share of annual economic output from 98 per cent in 2023 to 118 per cent in 2033 and 195 per cent in 2053.

But the debt ceiling bill passed by House Republicans in April cuts spending in the part of the budget that is already putting downward pressure on the debt. So-called “discretionary” spending — which includes education, transport, housing assistance and public health — is projected to fall by nearly 1 percentage point of annual GDP over the next three decades. 

Meanwhile, spending on Social Security and Medicare is projected to rise as a share of annual GDP from 8.2 per cent in 2023 to 10.1 per cent in 2033, and 11.9 per cent in 2053. These programmes — plus growing interest payments on the debt — are responsible for the unsustainable path of the national debt. But there is bipartisan agreement not to cut spending on them. 

When it comes to politics, the normalisation of brushing up against default combined with leaders that have waning influence over members of their parties is a catastrophe waiting to happen. Even if President Joe Biden and House Speaker Kevin McCarthy pull it off this time, this is a powder keg for future debt ceiling negotiations. 

The hardline Freedom Caucus has signalled that it has very limited appetite for compromising on any provisions in the House bill. Chip Roy, a key House Republican, sent a memo to his colleagues this week arguing that each provision in the bill is “critical and none should be abandoned solely for the quest of a ‘deal’”.

It will be an arduous task for McCarthy to convince hardliners and chaos agents in the House to support a compromise. His position is precarious. Any one member is able to force a vote on removing him from office. 

Can Biden deliver sufficient Democrats to support a deal that has enough of what the House GOP wants, so that McCarthy can bring it to his members? To illustrate the challenge, consider tougher work requirements for safety net programmes. These are part of the House bill, and McCarthy has called them a “red line” in the negotiations.

Biden suggested that he might be open to modestly strengthening some requirements for able-bodied adults without dependants. But progressive Democrats have stated that this is a non-starter. Could Biden find enough House Democrats — as many as 100 may be needed — to support a compromise that strengthened these requirements when the party’s progressives are so opposed?

The main problem is not Biden and McCarthy. It is structural. The extremist wings of both parties have increased their relative power over centrists, in part reflecting changes in the electorate itself. Politicians facing re-election want to appear ideologically pure in order to avoid a challenge for their party’s nomination. They are less concerned about appealing to general election voters by passing laws that reflect bipartisan compromise. This in turn draws in more extreme candidates, aggravating the problem and further weakening the grip that leaders have over party members. 

Assuming the present crisis passes, how should Congress move forward? Address the structural problems. The debt ceiling would be less of an issue if the national debt were on a downward trajectory. This will require increasing projected tax revenue and decreasing future spending on Social Security and Medicare.

Legislation to this effect should also recognise that politics is more extreme and politicians more unruly. In the future, adequate increases in the debt ceiling should be automatically linked to any law that would add to the budget deficit.

Enacting these structural reforms would be a Herculean task. But the alternative could leave the US as a deadbeat nation that can’t pay its bills on time, sagging under the weight of its debt. The US’s place as a global economic and political leader would be greatly diminished — to the detriment of the nation, and the world.

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