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…
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