People are worried about the fight against the debt ceiling. Many think that this is unhealthy and a sign of bad fiscal management, and they are right. They should take some getting used to, though. These budget battles will become more frequent and fiercer. That’s because no one wants to talk about budget constraints. It is true that existing spending commitments are rapidly reducing the share of the budget that politicians control as their appetite for spending expands.
Those who believe that the government is the answer to all problems are always full of ideas for new programs to be funded. They want to prepare for the next pandemic or emergency by funding new government capabilities. They want the government to start an energy revolution while simultaneously paying off all outstanding student loans, as well as all future enrollments. They also want the government to relieve parents of the financial burden of raising children while expanding the military and funding every project on the books.
Lawmakers will likely be able to pass some legislation and take at least small steps toward funding some of these big policy projects. But I wouldn’t count on either of them being fulfilled – and not just because government usually fails at its loftier goals. Rather, because these ambitious goals will have to be financed mostly from the discretionary part of the melting federal budget.
Indeed, the discretionary budget is what pays for homeland security, most of the military, farm subsidies, education, and more. It is the only part of the budget that legislators directly and regularly control. Today, discretionary spending accounts for 30 percent of total spending. In 1970, it was 62 percent. Defense spending accounts for roughly half of that and 14 percent of the total budget.
In contrast, the amount spent on nondiscretionary programs such as Social Security, Medicare, and Medicaid doubled as a share of total spending, from 31 percent of the budget in 1970 to about 62 percent in 2023.
Meanwhile, interest payments on the national debt are another fast-growing component of the federal budget’s mandatory spending. In total, mandatory spending on entitlements and interest payments makes up more than 70 percent of the budget and is projected to consume more than 80 percent by 2040. Lawmakers hardly have a say on such payments, even though they increasingly dominate the budget.
Moreover, many mandatory spending programs are growing even faster than the economy and will therefore rely heavily on borrowing. Beyond the debt problems we might face, this reality has serious implications for all those politicians who believe they can finance their new projects or expand existing ones with the discretionary side of the budget. The budget turnip quickly runs out of blood.
So expect more intense budget battles. While discretionary spending continues to grow nominally, albeit at a slower rate, lawmakers will increasingly struggle with how to spend this ever-shrinking budget while overall spending simultaneously explodes. There won’t be much political room to increase discretionary spending from borrowed money. And with fewer dollars to spend on traffic, the competition for each will become more intense.
In that fight, it won’t matter that, for example, defense is a legitimate function of the federal government while education should be funded at the state, local, and private levels—or even that some new program is truly worthwhile. It will be more important which party is in power and which politicians are positioned to allocate funds where they want.
Of course, with our debt and deficit growing, lawmakers will try to collect more taxes. If they succeed, the revenue will be the last straw in the mandatory red ink bucket. However, I predict that their efforts will fail.
A look at the data shows that regardless of federal tax rates under the current regime, since the 1940s, collections have never been more than 20 percent of GDP. That’s partly because politicians are under pressure to redistribute a lot of resources back to taxpayers through the tax code with provisions like the child tax credit and other deductions. Adding to the difficulty is the fact that higher marginal tax rates slow the economy and ultimately limit the scope of tax collection because Americans earn less money.
If you’re tired of the debt limit fights, I’m sorry to report that they’re just the beginning of a long line of fights over fiscal management.
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