A new report from the nonpartisan Congressional Budget Office shows that the amount of money spent by the federal government each year to service our national debt is on track to reach unprecedented highs within the next 10 years. These findings should give Congressional Democrats renewed urgency to pass a reconciliation bill that reduces federal budget deficits before the political window for action closes later this summer.
The good news is that the 2022 edition of the CBO’s annual Budget and Economic Outlook, published Wednesday, showed this year’s federal budget deficit falling dramatically from its $3.1 trillion peak in 2020. The decline was due almost entirely to the expiration of stimulus programs created to shepherd the economy through the COVID pandemic, and the rapid economic growth those programs helped facilitate. But these stimulus measures also came at a cost: They both increased our national debt and contributed to higher rates of inflation, which the Federal Reserve is now rapidly raising interest rates to combat.
Because the national debt has swollen, and the rate of interest our government has to pay on that debt is higher, the federal government is now projected to spend an alarming amount on annual interest payments over the coming decade. By 2030, CBO estimates the federal government will spend more than $1 trillion each year servicing our national debt. That’s more than it spends on national defense. And by 2032, annual interest payments are on track to equal 3.3% of gross domestic product, which would be the highest level in American history. This year’s report is the first in recent memory to project such record-breaking interest costs materializing within the next decade.
Higher interest costs threaten to crowd out important investments that the federal government should be making. For example, CBO’s report also estimated that the Infrastructure Investment and Jobs Act (commonly referred to as the Bipartisan Infrastructure Law) passed last year will be a net contributor to economic growth. This finding underscores the benefits of robust public investment and should spur passage of other similar measures, such as the bipartisan innovation bills currently being conferenced by the House and Senate. But the next generation of leaders may not be able to make similar investments in the future if too much revenue is consumed on higher interest costs.
If anything, CBO’s projections understate the problem because the agency is required to assume many policies that are in place today will expire when they are scheduled to by the law as it is currently written. For example, if Congress made permanent the Trump tax cuts that are scheduled to expire in 2025, CBO estimates deficits between now and 2032 would be over $2 trillion more than currently projected. As a result, both debt and interest costs would be higher if today’s policies remain in place.
These projections show Sen. Joe Manchin was right to be concerned about the Build Back Better Act the House passed last year. If the spending programs included in that bill were enacted permanently, they would have added $3 trillion to federal deficits. But CBO’s report also shows that Democrats must not abandon the filibuster-proof reconciliation process, which is still the party’s best hope for passing important budget policy changes.
Shortly before President Biden’s State of the Union address, I wrote a column urging Democrats to pursue a reconciliation bill that would fully fund a few targeted investments in clean energy and care from the BBBA, but increase revenues by twice as much as it increased spending so it could reduce deficits. Days later, Sen. Manchin called for the exact same thing. Manchin’s colleagues should be doing everything they can to take him up on the offer.
A reconciliation bill along these lines won’t completely solve our nation’s fiscal problems. To do that, policymakers must remedy the fact that health care and retirement programs such as Medicare, Medicaid, and Social Security — already the largest programs in the federal budget — are growing much faster than the revenues needed to finance them.
But passing such a bill would still be a clear win for Democrats. Not only would it allow them to enact critical progressive priorities from the BBBA that might otherwise never come to fruition, it would also be the biggest act of deficit reduction passed under one-party government since 1993. This down payment would demonstrate to swing voters that the Democratic Party is serious about curtailing deficits. And because government deficits pump money into the economy that is used to bid up the prices of scarce goods and services, a deficit-reducing reconciliation bill may also be the single greatest contribution Congress could make to fighting inflation in the near future.
Democrats must move quickly because the window for action is closing. If lawmakers don’t pass something before the August recess, it is unlikely they will be able to do so before the midterm elections, when Republicans may take control of one or both chambers of Congress. After that point, any deficit-reduction bill would be on terms far less favorable for progressive priorities, and it would be unlikely to include pro-growth public investments that could pass in a Democrats-only bill this year. It’s essential for Democratic leaders get this bill done now while they still can.