Potential Debt Ceiling Deal Would Barely Change Federal Spending Path

Potential Debt Ceiling Deal Would Barely Change Federal Spending Path

As their debt limit negotiations with President Biden bring the country perilously close to a devastating default, House Republicans remain true to a clear message: They must force a change in what they call the country’s “unsustainable” spending trajectory.

But in talks with Mr. Biden, Speaker Kevin McCarthy and his deputies have focused almost exclusively on cutting a small portion of the budget — so-called non-defense discretionary spending — which includes funding for education, environmental protection, national parks, domestic law enforcement and others belongs areas. That budget line accounts for less than 15 percent of the $6.3 trillion the government is expected to spend this year. In historical comparison, it is not oversized. Its share of the economy is already forecast to shrink over the next decade.

And it has nothing to do with the big drivers of projected spending growth in the coming years: the safety-net programs Social Security and Medicare, which are facing ever-increasing payouts as America’s population ages.

These politically popular programs have been branded off-limits in current talks by Republicans, who have been heavily criticized by Mr. Biden for even contemplating changes that could raise the retirement age for these programs or make other changes to limit their future spending throttle.

Republicans have also refused to consider cuts in military spending that are nearly as large as non-defense spending. As such, it is almost certain that the negotiations will not result in an agreement with Mr. Biden that would dramatically alter the trajectory of federal spending over the next decade.

Instead, they would focus budget cuts on education, environmental protection and a host of other government services, which financial experts say will be far from being the main sources of spending growth in the coming years.

For example, if Republicans could somehow persuade Mr. Biden to accept the full round of discretionary spending cuts contained in the budget bill passed by the House of Representatives last month, it would do little to change the country’s overall spending trajectory over the next decade. According to the Congressional Budget Office, these cuts would reduce federal spending by about $470 billion in 2033 and likely save about $100 billion in borrowing costs that year.

Total government spending would then be just under 24 percent of the economy – or almost as high as today.

While these cuts might not have a major impact on the overall budget, they would still be felt by many Americans. Because the cuts would be so limited to one segment, many popular government programs would shrink by up to 30 percent in this scenario, White House officials and independent analysts have calculated.

“The cuts proposed by Republicans would have serious implications for education, public safety, child care, veteran health care and more,” White House Treasury Secretary Shalanda Young wrote in a memo last week.

Republicans have for months cited rising federal spending and debt as the reason they have refused to raise the country’s borrowing limit — risking a default — unless Mr. Biden agrees to spending cuts.

Louisiana Rep. Garret Graves, one of Mr. McCarthy’s top negotiators, said this week that the biggest difference with Biden administration officials is on spending numbers. “My interpretation of their position is that they don’t realize or care that we are currently on a spending trajectory that is absolutely unsustainable,” he said.

Federal spending skyrocketed during the Covid-19 pandemic, first under President Donald J. Trump and then further under Mr. Biden, as lawmakers provided trillions of dollars in support for businesses, people, and state and local governments. Measured by the share of the economy, it is still above historical norms. This is the easiest way to track spending patterns as prices have increased over time.

The Congressional Budget Office estimates that total spending from 1980 to 2019, just before the pandemic hit, averaged just under 21 percent of gross domestic product. In 2020 and 2021, it rose to over 30 percent. It is expected to be just over 24 percent this fiscal year, falling slightly over the next few years, and then starting to grow again in the final years of this decade, rising to over 25 percent in 2020 by 2033.

However, the share of discretionary spending in the economy is expected to decline over the decade. Military spending — which Republicans have so far refused to cut as part of talks with Biden’s team — is likely to fall slightly from 3 percent of the economy. Non-military discretionary spending is currently 3.6 percent but is projected to decline to 3.2 percent by 2033.

In contrast, Social Security and health insurance are expected to grow rapidly over the next decade as retiring baby boomers become eligible for health and pension benefits. Social Security spending will increase from 4.8 percent to 6 percent of the economy over this period, the Budget Office predicts, and Medicare will increase from 3.9 percent to 5.3 percent.

Analysts say these programs are the main reason budget projections have long shown an increase in federal spending over the coming decades — even before Mr. Biden took office.

“The overall long-term increase in federal spending as a percentage of GDP can be attributed to the growth of the major federal health programs (Medicare, Medicaid, and ACA) and Social Security,” said Charles P. Blahous, who studies federal spending and debt at George Mason University’s Mercatus Center , he told the Senate Budget Committee in a written statement this month.

Conservative groups have criticized Republicans for not factoring safety-net programs into debt demands. “While the current debt ceiling negotiations are largely about ways to constrain the discretionary parts of the budget, any serious proposal to address the emerging debt and deficit crises must also consider our biggest mandatory spending programs: Social Security and Medicare,” says Alex Durante, Economist at wrote the tax foundation, which works for lower taxes, on Wednesday.

Liberal groups and the White House have criticized Mr McCarthy and his team for neglecting the other side of the financial book: the country’s tax system. Tax revenues rose briefly last year, but are likely to fall back to historical levels this year and stabilize at around 18 percent of the economy, according to forecasts by the budget office. Mr McCarthy has referred to last year’s figures to falsely claim current tax receipts are near record highs.