Fitch’s downgrade of the U.S. credit rating set Democrats and Republicans in Congress to bickering over which of them caused the downgrade: Democrats for spending too much or Republicans for not raising taxes to cover the expenses they voted into the budget.
This is the same partisan squabbling “that [Fitch] said was raising concerns about America’s ability to tackle its swelling budget deficit,” The Wall Street Journal noted.
“The two parties aren’t considering the policies that could meaningfully address the problem: raising taxes or cutting spending on major programs such as Medicare and Social Security,” the WSJ added.
“There’s no imminent sign of Congress having the political will to address our entitlement programs or the revenue that funds them and the rest of the government,” Shai Akabas, economic policy director at the Bipartisan Policy Center, told the WSJ. “It’s a sign of worse things to come if we don’t get our fiscal house in order.”
After shrinking last year, the annual budget deficit has grown by 170 percent in the first nine months of the new spending year, the Congressional Budget Office (CBO) reported, including $131 billion more in interest, an increase of 25 percent from the previous year.
Social Security will take 5.1 percent of federal spending this year and rise to 6.0 percent by 2033. Spending on Medicaid, Medicare, and other mandated health programs will rise from 5.8 percent of the budget now to 6.6 percent over the next ten years, the CBO said.
At current rates of increase, net interest costs will gobble 3.7 percent of the annual federal budget, the CBO has projected.
Without increased rates of funding, the Social Security trust fund will run out of money in 2034; Medicare’s hospital-cost trust fund will go broke in 2031.
Congress faces a reckoning in 2025, when tax benefits for working and middle classes included in the 2017 tax cut law expire. (Cuts for corporations and high earners were made permanent in the law.)
President Joe Biden had proposed to raise tax rates for corporations, capital gains, and the highest earners, but moderate Democrats joined Republicans to defeat the plan in Congress.
In the longer term, the federal debt is on trend to double from 98 percent this year to 181 percent in 2053, according to a CBO analysis.
The nonprofit Committee for a Responsible Federal Budget pegged the outlying figure even higher, at 222 percent.
The CBO’s “30-year projection is bleak,” Stephen Pavlik, CEO of the research firm Renaissance Macro, wrote in a note, saying the U.S. government is “drowning in debt. Rising debt plus rising interest costs equals [a] debt servicing cost disaster.”
The federal government paid $475 billion in interest in 2022, 35 percent more than the $352 billion in 2021. The cost will rise to $663 billion this year due to sharply higher interest rates and new government spending on infrastructure repair, strengthening the domestic computer chip industry, and other programs.
Historically, when interest payments consume 14 percent or more of a nation’s GDP, “a prolonged period of austerity” ensues, analysts at Glenmede Investment Management wrote in a note.