U.S. Congress Faces Calls for Fiscal Commission as Debt Crisis Looms

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U.S. Congress Faces Calls for Fiscal Commission as Debt Crisis Looms

U.S. Congress faces calls for commission to tackle rising deficits and debt

Lawmakers propose bipartisan commission to address ballooning national debt and fiscal challenges

2023/11/21 (Nov 21st, 2023 4:19 pm)

A Growing Concern for Budget Deficits and National Debt

The U.S. Congress is under pressure to find solutions for skyrocketing budget deficits and escalating debt after Moody’s recent warning about potential credit rating downgrades due to political dysfunction. With the national debt having doubled over the last decade to reach $33.7 trillion (124% of GDP), lawmakers have three main options to consider: raising taxes, cutting spending, or implementing a combination of the two.

Given the current circumstances and the fact that interest rates are on the rise, some legislators are advocating for the establishment of a commission to develop practical strategies for tackling the growing debt burden. According to the Treasury Department, interest payments on the national debt alone are projected to reach an astonishing $659 billion in fiscal year 2023. Senator Mike Braun, a member of the Budget Committee, emphasizes the urgent need for such a fiscal commission, stating that deficits and debt could become pivotal issues in the 2024 elections.

The Rising National Debt: Causes and Concerns

Since 2013, the national debt has more than doubled from $16.7 trillion. During this period, tax reductions introduced by Republicans have diminished revenues, while both parties have endorsed increased spending, partly in response to the COVID-19 pandemic. Moody’s warns that persistently high interest rates will further drive up borrowing costs. In fact, Fitch ratings agency downgraded the U.S. government’s credit rating to AA+ from AAA in August, citing the congressional stalemate that brought the nation perilously close to defaulting on its financial obligations.

Proposed Solutions and Expert Recommendations

Addressing the urgent need for a bipartisan approach to solving the fiscal crisis, Michael Peterson, CEO of the non-partisan Peter G. Peterson Foundation, calls for the formation of a commission. This commission can explore potential solutions by drawing on the expertise of various economists and researchers.

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For instance, Mark Zandi, chief economist of Moody’s Analytics, suggests levying a new tax on greenhouse gas emissions and altering the government’s cost-of-living adjustment formula for federal benefit programs. Economists Dana Peterson and Lori Esposito Murray propose reducing the debt-to-GDP ratio to 70% by 2043 through a combination of tax increases and spending cuts. Other recommendations include increasing Social Security taxes for high-income earners and gradually raising the retirement age to 69.

Bipartisan Efforts and Challenges Ahead

Senator Joe Manchin, a Democrat, and Senator Mitt Romney, a Republican, have sponsored a bill to create a bipartisan commission that would likely conclude its work by 2025. The support of House Speaker Mike Johnson adds optimism for the future of such a commission. However, critics, including independent Senator Bernie Sanders, are cautious and express concerns about potential negative implications for Social Security. Sanders suggests exploring alternatives such as removing the cap on taxable income to fortify the Social Security trust fund.

It is widely believed that the commission’s effectiveness hinges on its ability to compel Congress to act on its recommendations. This requirement could eventually persuade Republicans to soften their resistance to tax hikes if the commission suggests them as viable options.

Expert Analysis

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Analysis: Bearish Impact of High Debt-to-GDP Ratio

The U.S. Congress is facing mounting pressure to address the country's rising national debt, which has reached $33.7 trillion, equivalent to 124% of GDP. This high debt-to-GDP ratio poses significant risks to the economy and could have a bearish impact on various sectors.

1. Rising Interest Rates and Borrowing Costs

The increasing debt burden coupled with rising interest rates could lead to higher borrowing costs for the government. As a result, public spending for critical programs may be constrained, potentially affecting sectors such as infrastructure, education, and healthcare.

2. Potential Credit Rating Downgrades

Moody's recent warning about potential credit rating downgrades due to political dysfunction further exacerbates the bearish outlook. A downgrade in the U.S. government's credit rating could lead to higher borrowing costs not only for the government but also for businesses and consumers. This could hamper economic growth and negatively impact the stock market.

3. Fiscal Constraints and Reduced Policy Flexibility

The ballooning debt-to-GDP ratio limits the government's ability to implement fiscal stimulus measures during economic downturns. This reduced policy flexibility could hinder efforts to combat future recessions or financial crises, potentially resulting in prolonged economic downturns and impacting investor confidence.

4. Potential Tax Increases and Spending Cuts

To address the debt crisis, policymakers may consider raising taxes or implementing spending cuts, both of which can have bearish implications. Higher taxes could reduce disposable income for individuals and limit corporate profits, while spending cuts might negatively impact sectors reliant on government contracts or subsidies.

5. Political Challenges and Uncertain Policy Outcomes

The creation of a bipartisan commission to tackle the debt crisis highlights the political challenges in finding effective solutions. Divided opinions on tax hikes, spending cuts, and potential implications for programs like Social Security further complicate policy outcomes. This uncertainty can sow market volatility and deter investor confidence.

Conclusion

The high debt-to-GDP ratio in the United States carries significant bearish implications for the economy, including increased borrowing costs, potential credit rating downgrades, fiscal constraints, tax increases, and political challenges. The outcome of efforts to address this crisis will be closely watched by market participants, as it will shape economic prospects and market performance in the coming years.

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What is the current national debt in the US?

The national debt in the US is currently $33.7 trillion, which is 124% of GDP.

What are the options lawmakers have to address the growing debt?

Lawmakers have three main options to address the growing debt: raising taxes, cutting spending, or implementing a combination of the two.

What are some proposed solutions for tackling the growing debt burden?

Some proposed solutions include establishing a fiscal commission, levying a new tax on greenhouse gas emissions, altering the government's cost-of-living adjustment formula, reducing the debt-to-GDP ratio through a combination of tax increases and spending cuts, increasing Social Security taxes for high-income earners, and gradually raising the retirement age.

What bipartisan efforts have been made to address the fiscal crisis?

Senator Joe Manchin and Senator Mitt Romney have sponsored a bill to create a bipartisan commission, with the support of House Speaker Mike Johnson.

What are some of the concerns and challenges ahead in addressing the national debt?

Some concerns include potential negative implications for Social Security and resistance to tax hikes. The effectiveness of the commission will depend on its ability to compel Congress to act on its recommendations.