Two Years of Sounding the Alarm: Reflections and Progress on Addressing the US Debt Crisis

Romina Boccia

It’s been two years since I joined the Cato Institute as director of federal budget and entitlement policy. Over the past year, we’ve made significant progress in advancing ideas that would address our ballooning national debt, at a time when several fiscal developments increased the urgency to correct course. From the alarming rise in interest costs on the national debt, to Moody’s lowering the US credit rating outlook, to inflation persisting above the Fed’s target rate, these events have painted a stark picture of America’s fiscal challenges and their economic fallout, with the worst yet to come.

I’ve been fortunate to have two highly capable research associates join my team since: Dominik Lett and Ivane Nachkebia. I’m proud of the strides we’ve made in increasing awareness and advancing support for policy reforms to address the key drivers of the unsustainable growth in federal spending and debt. Below is a retelling of major fiscal developments over the past year with some special highlights of the impact we’ve been able to make.

Political Shifts over Funding Battles

The past year has been marked by a series of tumultuous events in Washington, DC, from funding the government to debating additional aid for Ukraine to a change in House leadership. In September 2023, as the end of the fiscal year was approaching, Congress launched a series of stopgap measures to keep one-third of the government funded that depends on an annual vote. While those policy debates were heated, they made little progress towards the underlying issues of out-of-control old age benefit spending—which is not subject to regular review.

When Mike Johnson replaced Kevin McCarthy as Speaker of the House in October, this created an opening for a fresh approach to passing appropriations. Avoiding a massive omnibus bill was a welcome shift towards more transparency and accountability instead of jamming bad policy through Congress, with legislators up against a Christmas holiday deadline. However, the subsequent funding packages, while avoiding the dreaded holiday omnibus, only kicked the can further down the road.

Congress passed two funding packages into law for FY24 in March, avoiding a government shutdown and concluding the spending battle from the fall, all while continuing to pad the bottom line with inappropriate emergency designations and other gimmicks. Just a month later, the US government authorized an additional $95 billion foreign aid package to Israel, Ukraine, and Taiwan, without paying for it.

The good: Congress avoided an omnibus, thereby avoiding a slew of bad policies that tend to get tucked into such year-end packages (see here for an example). Congress also considered Ukraine and other foreign aid requests on their own merits with separate votes for each package, which helped to control the size and scope of each package. Congress also rejected the Biden administration’s domestic supplemental request, avoiding $56 billion in additional deficit spending. We were heavily involved in building support for these strategic shifts and educating on their importance.

The bad: Congress got tied up in domestic funding battles for most of the fall and spring, increased discretionary spending above pre-pandemic levels, and busted the spending caps with added emergency spending and other gimmicks.

Upcoming progress: The House Budget Committee has launched a new initiative to curb the abuse of emergency spending and reliance on gimmicks, with several members introducing bills based on recommendations we’ve made in our seminal paper, “Curbing Federal Emergency Spending.”

Raising Awareness over Rising Debt and the Threat of a Fiscal Crisis

As we moved into 2024, the national debt soared to unprecedented levels, surpassing $34 trillion earlier in the year only to surpass $35 trillion just a few months later. Even excluding, intergovernmental debts owed to Medicare and Social Security, America’s publicly held debt is approaching the size of the economy and growing at a dangerous pace from here on out.

These staggering figures should serve as a wake-up call to lawmakers, yet meaningful action remains elusive. The passage of the Fiscal Commission Act of 2024 by the House Budget Committee in January on a bipartisan basis was a rare bright spot, representing a critical step towards beginning a conversation about how to stabilize the debt. The Act’s goal of reducing the debt-to-GDP ratio to 100% aligns closely with proposals I’ve been pushing, particularly the establishment of a BRAC-like fiscal commission with clear objectives and public accountability.

Preceding that vote, I was excited to see that support for a fiscal commission became a litmus test for any serious Republican running for Speaker of the House. Following then-Speaker McCarthy’s endorsement of a BRAC-like fiscal commission in both June and September, newly-elected Speaker Johnson endorsed the concept of a bipartisan debt commission upon taking the helm in October. The media also picked up on my fiscal commission push, asking House Budget Committee Chair, Jody Arrington (R‑TX), specifically about his thoughts on the ‘Cato proposal.’ More recently, a student attending the Coolidge Foundation conference on debt confronted former House Budget Committee Chair, and former House Speaker Paul Ryan about my BRAC-like fiscal commission idea.

Despite these promising efforts, the fiscal situation continues to deteriorate. The Fitch downgrade of the US credit rating in 2023 was followed by Moody’s decision to lower its outlook to negative. This reflects growing concerns about the sustainability of US debt. Even the IMF calls for fiscal restraint with its warnings tailor-made for the US:

“Governments should immediately phase out legacies of crisis-era fiscal policy, including energy subsidies, and pursue reforms to curb rising spending while protecting the most vulnerable. Advanced economies with aging populations should contain spending pressures for health and pensions through entitlement reforms and other measures.”

Growing Spending on Entitlements Continues Unabated

One of the most frustrating aspects of the past year has been the continued unwillingness of lawmakers to address the root causes of our fiscal problems: runaway spending and the growing burden of entitlement programs. President Biden’s FY25 budget proposal, introduced in March 2024, claims to deliver on fiscal responsibility, but it merely shifts the burden through higher taxes rather than tackling the unsustainable growth in mandatory programs.

The administration’s latest student loan forgiveness plan, announced in April, is another example of reckless spending that ignores the larger fiscal crisis we face. The potential cost of this proposal, estimated between $250 and $750 billion by the Committee for a Responsible Federal Budget, adds to our already staggering deficits and normalizes the kind of fiscal irresponsibility that threatens our economic future.

Encouragingly, both the House Budget Committee and the Republican Budget Committee (RSC) put forth plans to stabilize government spending and debt, with the RSC taking the bold step of including specific Social Security reforms in its FY 2025 budget plan. These included reducing benefits for higher earners “who are not near retirement,” increasing the retirement age to better align with increases in life expectancy, and gradually reducing auxiliary benefits (i.e., benefits for family members) for high-income individuals. This was a welcome step, especially in an election year.

Another promising development is the House Budget Committee introducing the Cost Estimates Improvement Act, which would require the CBO to estimate the interest cost of proposed spending bills. As net interest is the fastest growing portion of the debt, accounting for interest costs is essential to properly understand the effect of more deficit spending on the debt. This reflects an overdue policy change that I’ve been pushing for quite some time, and that I prioritized in a recent statement for the record to the committee.

Regretfully, several groups came out in opposition to the Fiscal Commission Act that passed the House Budget Committee, which further incentivized congressional and executive procrastination on reducing unsustainable entitlement spending. The bill has yet to be brought to the congressional floor.

Looking Ahead: The Path to Fiscal Sanity

As we move into the latter half of 2024, the challenges we face are daunting, but not insurmountable. The 118th Congress and President Biden have squandered many chances to correct the fiscal course—from agreeing to an irresponsible debt limit deal to allowing executive spending to run amok to authorizing more money for foreign and domestic emergencies with no intention to pay it back. There’s still an opportunity for this Congress and President Biden to begin the important work of stabilizing the US debt and reducing inflationary pressures.

The lame-duck period, following the November elections, might offer an ideal window of opportunity to establish a fiscal commission to consider all the options before US legislators and propose a package that will rein in out-of-control spending and debt. Setting spending reforms into motion before this year is over would position the next president to advance meaningful action on reducing spending during a looming tax debate that threatens to worsen the fiscal outlook by several trillion.

Congress currently spends about $2 trillion more than it raises in revenue, deficit levels unheard of outside of severe financial or public health crises in US history. Only spending reductions will sustainably address the structural imbalance driving the growth in the US debt. Future generations will be confronted with the costs of excessive government spending through some combination of higher taxes, higher inflation, and slower economic growth.

A well-designed fiscal commission can help Congress overcome political barriers to stabilizing the US debt, ensuring that the next generation reaps the blessings of a free and prosperous United States economy, instead of saddling us with a fiscal crisis of our own making.

For my one year anniversary post from last August, see here.