Working Paper on Growing Risks to the Budget and the Economy

The Federal Government’s fiscal policy remains on an unsustainable path. Deficits are growing once again and are expected to double over the next 10 years, to more than $1.2 trillion – on par with annual deficit levels reached just after the financial crisis earlier this decade (in nominal terms). Growing deficits are driving debt to dangerous levels. Debt held by the public is projected to rise from roughly 76 percent of gross domestic product this year to more than 85 percent by 2026, twice the average of the past 50 years (39 percent) and the highest level since the end of World War II. By 2046, this publicly held debt is expected to reach 141 percent of gross domestic product, surpassing the historical high of 106 percent that occurred just after World War II.

At the same time, the U.S. economy is mired in slow growth. Real economic growth has averaged just more than 2.0 percent the past five years, well below the U.S. historical average of roughly 3.0 percent and marking the weakest economic recovery of the modern era. From 1950 through 2000, the U.S. economy grew at about 3.6 percent per year; since 2000, it has grown at barely half that rate, 1.8 percent. Even one recent glimmer of hopeful economic news – an increase in real median household income in 2015 – required six years to occur and still left incomes below their pre-recession peak in 2007. Further, even though the poverty rate declined in 2015, it remained above its pre- recession level, with six million more poor people.

The answer to these twin problems is not more Keynesian-style government spending and borrowing. Instead, lawmakers should pursue pro-growth policies and strive to gain control of spending and deficits. This is the most promising combination for restoring growth, raising standards of living, and achieving a sustainable budgetary path. 

Read the full paper here.