An effective fiscal commission must put taxes and entitlements on the table

Following the passage of the Fiscal Responsibility Act of 2023, House Speaker Kevin McCarthy (R-Calif.) expressed interest in appointing a bipartisan commission to address the nation’s long-term fiscal imbalance. That idea has now drawn support from the newly formed Bipartisan Fiscal Forum. 

These are very promising developments, but only if both parties are prepared to put everything on the table. This is not simply a political imperative. It is a policy imperative as well.

The political imperative comes from the need to build trust across party lines. Neither party wants to go it alone in proposing tough choices out of fear that the other side will attack them. Similarly, neither side wants to discuss possible compromises of their own priorities out of fear that the other side will take the concessions and run. Unfortunately, these fears are justified. The only way to get both parties at the table is to ensure that all options can be discussed in good faith.

The policy imperative to put everything on the table comes from the sheer magnitude of our fiscal imbalance. The Congressional Budget Office projects that under current law, annual budget deficits will grow from 5.8 percent of GDP this year to 10 percent in 2053. Debt held by the public is already near a historic high and is projected to nearly double over the next 30 years.

Another way to consider the challenge is to look at the “primary deficit,” which excludes interest on the debt. This is useful because it measures the difference between the cost of government programs (primary spending) and revenues. As CBO explains, these are “the main mechanisms through which lawmakers can directly influence the trajectory of the federal debt and interest costs.” 

The CBO projects a persistent primary deficit averaging 3.1 percent of GDP between now and 2053, a level that far exceeds the 1.5 percent average over the past 50 years. It is the added annual costs of servicing these primary deficits that produce a vicious cycle of rising deficits and debt. In CBO’s projections, interest costs rise from 2.5 percent of GDP this year to 6.7 percent of GDP in 2053.

We are truly headed into uncharted waters and it is difficult to conceive of a remedy that does not draw from all parts of the budget.

A crucial factor propagating future deficits is population aging. An aging population accounts for all of the Social Security growth. The major healthcare programs grow due to a combination of population aging and higher costs per beneficiary, which CBO refers to as “additional cost growth.” Over the next 30 years, about one-third of the cost growth for healthcare programs is attributable to population aging, while the remaining two-thirds comes from rising costs per beneficiary.

Other federal programs, including defense and nondefense discretionary spending, are actually projected to shrink as a share of GDP over the next 30 years. If a fiscal commission were to leave Social Security and healthcare programs off the table, it would exempt the main cost drivers of the budget and undermine its chances of substantially improving the long-term budget outlook.

On the revenue side, there is superficial good news. In CBO’s estimate, revenue under current law will grow from 18.4 percent of GDP this year to 19.1 percent in 2053. That would exceed the past 50-year average of 17.2 percent and roughly keep pace with the increase in primary spending. But there is a significant glitch in the current law revenue projection: It assumes a substantial boost beyond 2025 with the scheduled expiration of many tax cuts enacted in 2017.

According to CBO, extending these tax cuts (and if history is a guide there will be great political pressure to do so) would drive revenues lower relative to the baseline by about 0.8 percent of GDP on average. In other words, it’s quite likely that revenues will flatten or even fall as a share of GDP over the next 30 years. 

Theoretically, the primary deficit could be closed all on the spending side or all on the tax side but neither of these outcomes stands the slightest chance of being supported by the public or being enacted by politicians wishing to be reelected.

While reforms should be enacted that would reduce the long-term growth in federal spending, it is unlikely that any realistic array of reforms would allow an aging society to keep spending from rising. What might have been adequate revenues in past years will not be sufficient in the face of growing commitments to the elderly.

Higher economic growth would help, but no realistic level of growth would be enough by itself to close the expanding budget gap. Here again, population aging is a factor. Labor force growth, a key component of economic growth, is projected to slow by about three-quarters from the recent historical average as the population ages and fertility rates remain low. Mainly for this reason, CBO projects that annual real GDP growth will fall to just 1.5 percent by the 2040s. This compares to an annual rate of 2.4 percent from 1993 to 2022. 

So there are some intractable problems for a new fiscal commission to address: population aging, rising healthcare costs, slowing workforce growth, stagnant revenues, and spiraling interest on the debt. A fiscal commission that does not get at these root causes by putting everything on the table will not be able to solve the problem.

Robert L. Bixby is executive director of The Concord Coalition.