This means looking at what new laws have been enacted. 14 The cause of the upward trajectory of the debt ratio-a series of massive tax cuts that have been extended with bipartisan support-are largely responsible for recent budget shortfalls.Īnalytically, the best way to measure why current projections show what they do is to assess what changed relative to older projections. Debt ratio stability is driven by four components: 1) the size of the primary deficit-the deficit exclusive of interest costs-as a percentage of GDP 2) the starting ratio of debt to GDP (the debt ratio) 3) the rate of economic growth and 4) the prevailing interest rate on new Treasury securities. While one-time costs, such as those made in response to an economic or public health emergency, increase the level of debt, sometimes by large amounts, they do not increase the rate of growth in the debt ratio over the long run. Understanding the drivers of the increase in the debt as a percentage of the economy is critical to this analysis. At this point, many experts argue 13 that the focus should be on whether debt as a percentage of the economy is increasing or is stable over the long run, not on the amount of debt per se. In the past few decades, 12 there has been considerable discussion and rethinking of what constitutes an appropriate level of national debt. Eventually, the tax cuts are projected to grow to more than 100 percent of the increase. Instead, these tax cuts have added $10 trillion to the debt since their enactment and are responsible for 57 percent of the increase in the debt ratio since 2001, and more than 90 percent of the increase in the debt ratio if the one-time costs of bills responding to COVID-19 and the Great Recession are excluded. If not for the Bush tax cuts 4 and their extensions 5-as well as the Trump tax cuts 6-revenues would be on track to keep pace with spending indefinitely, and the debt ratio (debt as a percentage of the economy) would be declining. But revenues are down significantly more. In fact, relative to earlier projections, spending is down, not up. House Republican leaders have used this fact to call for spending cuts, 3 but it does not address the true cause of rising debt: Tax cuts initially enacted during Republican trifectas in the past 25 years slashed taxes disproportionately for the wealthy and profitable corporations, severely reducing federal revenues. economy is on a path to grow indefinitely, with increased noninterest spending due to demographic changes such as increasing life expectancy, declining fertility, and decreased immigration and rising health care costs permanently outstripping revenues under projections based on current law. ![]() Long-term projections show 2 that federal debt as a percentage of the U.S. The need to increase the debt limit 1 has focused attention on the size and trajectory of the federal debt.
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