The U.S. isn’t fighting a war, a crisis or a recession. Yet the federal government is borrowing as if it were.
This year’s budget deficit is on track to top $1.9 trillion, or more than 6% of economic output, a threshold reached only around World War II, the 2008 financial crisis and the Covid-19 pandemic. Publicly held federal debt—the sum of all deficits—just passed $28 trillion or almost 100% of GDP.
If Congress does nothing, the total debt will climb by another $22 trillion through 2034. Interest costs alone are poised to exceed annual defense spending.
Publicly held debt as a share of GDP
PROJECTIONS
125%
World
War II
Covid
100
Financial
crisis
75
50
25
0
1940
’50
’60
’70
’80
’90
2000
’10
’20
’30
But the country’s fiscal trajectory merits only sporadic mentions by the major-party presidential nominees, let alone a serious plan to address it. Instead, the candidates are tripping over each other to make expensive promises to voters.
Economists and policymakers already worry that the growing debt pile could put upward pressure on interest rates, restraining economic growth, crowding out other priorities and potentially impairing Washington’s ability to borrow in case of a war or another crisis. There have been scattered warning signs already, including downgrades to the U.S. credit rating and lackluster demand for Treasury debt at some auctions.
Vice President Kamala Harris, the Democratic nominee, and GOP rival Donald Trump aren’t the same on fiscal policy. She has outlined or endorsed enough fiscal measures—tax increases or spending cuts—to plausibly pay for much of her agenda. He has not.
Still, both Harris and Trump were parts of administrations that helped produce those deficits. Both have promised to protect the biggest drivers of rising spending—Social Security and Medicare. And both want to extend trillions of dollars in tax cuts set to lapse at the end of 2025, amid bipartisan agreement that federal income taxes shouldn’t rise for at least 97% of households.
Surpluses/deficits as a share of GDP
10
%
PROJECTIONS
World
War II
Financial
crisis
Surpluses
0
Deficits
–10
Covid
–20
–30
1930
’40
’50
’60
’70
’80
’90
2000
’10
’20
’30
In the past few months alone, Trump has promised to exempt tips from taxation, end income taxes on Social Security benefits, eliminate taxes on overtime pay, lower tax rates for companies that manufacture in the U.S., and create a new deduction for new parents’ expenses, offering more than $2 trillion in tax cuts atop $4 trillion to extend his first-term tax cuts.
Harris matched Trump’s tips idea and called for an expanded child tax credit, including $6,000 for parents of newborns.
How did the U.S. fiscal path simultaneously become economically more alarming yet politically less relevant? Federal debt and deficits have blown past various imagined red lines and feared consequences have not materialized. Interest rates, at least until 2022, stayed low. The dollar remains the world’s reserve currency, giving the U.S. far more running room than other major countries. The U.S. of 2024 is not Greece of 2007. There is risk, but there is no fiscal crisis.
“We’ve learned we borrowed more than we realized we could,” said Jason Furman, a Harvard economist who was a top aide to President Barack Obama. “And we’ve actually borrowed more than we expected.”
If anything, borrowing kept the economy afloat during the 2007-09 financial crisis and pandemic, and lawmakers were rewarded for it. Polls show the public is concerned about the deficit, but they also prefer politicians who dangle tax cuts, stimulus checks and money for the military.
“No president in history, Republican or Democrat, gets a gold star or a Nobel Prize for reining in spending, the deficits and our debt,” said Rep. Jodey Arrington (R., Texas), chairman of the House Budget Committee. “Nobody gets the golden meat cleaver award.”
Whoever wins in November will soon face two big fiscal tests. One is the need to raise the federal debt limit, likely in mid-2025. In both 2011 and 2023, the threat of default without a debt-limit increase led to compromises that reduced red ink. The other trigger is the looming expiration of much of the 2017 tax law. If Congress doesn’t act by the end of 2025, taxes would rise on most households, a path to deficit reduction that both parties say they don’t want.
Government spending on interest versus defense
PROJECTION
$1.0 trillion
0.8
Defense
0.6
0.4
0.2
Interest
0
1980
’85
’90
’95
2000
’05
’10
’15
’20
’25
The deficit wasn’t always politically dormant. In fact, until the 2010s, it was something leaders of both parties fretted over, if not always acted upon.
In the early 1990s, when deficits were much smaller, deficit hawks were powerful enough in both parties to produce bipartisan deals that raised taxes and lowered spending. Those agreements helped drive the budget into balance in the late 1990s, aided by a strong economy fueled by baby boomers in the labor force and the so-called peace dividend after the Cold War ended. Federal debt fell to about one-third of GDP.
Deficits grew again when George W. Bush cut taxes in 2001 and 2003. In 2011 and 2013, though, Obama and congressional Republicans cut deals that, together, let taxes climb on high-income households and trimmed spending, slowing growth in debt.
The Trump record
When he first ran for president in 2016, Donald Trump said he would pay off the national debt within eight years. He went in the opposite direction: Debt rose from less than $15 trillion to more than $21 trillion by the time he left office.
While some of that was due to pre-existing trends and the pandemic, Trump made two major decisions that broke with Republicans in Congress and drove up federal borrowing.
Republicans had long advocated making Social Security and Medicare less generous and more fiscally sustainable. To appeal to middle-class voters, Trump embraced what had long been a Democratic position and shut down discussion of broad benefit cuts.
Then in 2017, when House Republicans sought to cut tax rates, Trump resisted their attempts to offset the full cost. The Tax Cuts and Jobs Act Trump eventually signed into law was projected then to increase deficits by $1.5 trillion over a decade.
Once the pandemic started, Trump joined the broad economic consensus that the U.S. needed to pour money into the economy, eventually adding more than $3 trillion to the debt to provide stimulus checks, enhanced jobless benefits and other relief.
The Biden-Harris record
President Biden and Harris expanded on Trump’s pandemic spending with the $1.9 trillion American Rescue Plan, which included another round of stimulus checks and aid to state and local governments. Their core domestic legislation—the Inflation Reduction Act of 2022, which required Harris’ tiebreaking vote—was originally estimated to reduce budget deficits. But the projected reduction has shrunk or disappeared altogether as estimates of key tax credits, including breaks for electric vehicles, have risen.
Biden, with Harris’s strong backing, canceled student debt in a series of executive orders that could cost the government more than $1 trillion, according to the Committee for a Responsible Federal Budget. The plan is now stuck in litigation as courts have curtailed Biden’s authority to cancel debt.
“I don’t think we’ve seen a president spend nearly as much without Congress as Biden,” said Marc Goldwein, the CRFB’s senior vice president.
Still, something important has changed for the fiscal outlook since the pandemic and the Democratic legislation: Inflation and interest rates have risen, and that creates a more dangerous dynamic going forward.
Trump’s plans
What happens if Trump wins depends on Congress. If Republicans also control the House and Senate, his next term could look a lot like his first—occasional talk about debt and deficits paired with tax cuts that expand both.
Fiscal Outlook Under Trump
How proposals by Donald Trump could affect deficits over 10 years
◀ INcrease Deficit
Reduce ▶
Lower corporate
rate for some
No tax on tips
No tax on overtime pay
No tax on Social
Security benefits
Extend expiring
tax cuts
Total
Repeal clean energy subsidies
Tariffs
Total
$6 trillion
$4
$2
$0
$2
$4
“There’s nothing that Republicans I think will be able to cut under Trump in a meaningful way,” said Don Schneider, a former House GOP aide now at investment bank Piper Sandler.
In his acceptance speech at the Republican National Convention, Trump said, “We’ll start paying off debt and start lowering taxes even further.”
Nonpartisan experts say there’s virtually no chance of that. Paying off debt would require the U.S. to shift from massive deficits to surpluses. Tax cuts would work in the opposite direction. Low tax rates can encourage growth and generate some revenue, but not enough to offset the loss of revenue, economists in both parties acknowledge.
Trump has indicated that he wants to extend the pieces of his 2017 tax law that expire after 2025 and lower the 21% corporate tax rate to 20%, and 15% for some companies. His recent proposals—eliminating taxes on workers’ tips, overtime pay and retirees’ Social Security benefits—dig a deeper hole. He’s also made other proposals that would entail significant new spending, including a mass deportation program and a domestic missile-defense system.
In Congress, Republicans are still debating whether to extend all of the tax cuts and whether to pair them with spending cuts or tax increases. If Democrats hold the House or Senate, they might object to extending all of Trump’s cuts. A full extension would produce “a $4.6 trillion increase in the debt in a manner that is heavily biased towards big corporations and very high income and high net worth individuals,” said Sen. Sheldon Whitehouse (D., R.I.), chairman of the Senate Budget Committee.
Trump has touted several ideas that could reduce deficits. One is impoundment, in which the president refuses to spend money Congress has appropriated. That’s legally and constitutionally dubious.
The other is tariffs. Trump wants to impose a tariff of 10% to 20% on all imported goods and even higher on Chinese products. That could raise about $2.8 trillion over a decade, according to the Tax Policy Center.
House Republicans have proposed capping federal spending growth at a level lower than inflation, though the party is split and some want significant increases in the defense budget.
Arrington, who is helping cobble together Republicans’ agenda if they have full control of Congress, said they need to tackle spending and entitlement programs and hopes Trump, despite his statements to the contrary, could be open to that. “We have an opportunity to live up to what we claim we believe when we campaign and why almost every Republican member was sent here to Congress by their constituents,” he said.
Arrington said he’s also open to a bigger deal with Democrats that would have higher taxes and lower spending on the table.
Harris plans
Harris has called for reviving and expanding the child tax credit that was in place during 2021 and for implementing new subsidies for first-time home buyers.
Fiscal Outlook Under Harris
How proposals by Kamala Harris could affect deficits over 10 years
Reduce ▶
◀ INcrease Deficit
Housing policies
Paid leave
ACA premium credits
Child care and pre-K
Other proposals
Child tax credit expansion
Extend expiring tax cuts
Total
Quadruple buybacks tax
Prescription drug policies
International corporate taxes
Capital gains and taxes
on very wealthy
Higher tax rates on
top earners/investors
Corporate tax rate increase
Other proposals
Total
$6 trillion
$4
$2
$0
$2
$4
She also largely endorsed Biden’s last budget, which calls for $3 trillion in deficit reduction over the next decade. But that plan comes with two big asterisks.
First, while the budget would raise taxes on the rich and corporations, the revenue isn’t enough to deliver the claimed deficit reduction, pay for Harris’ child tax credit and home-buyer subsidy proposals, and cover the Biden-Harris proposals to extend expiring cuts to prevent tax increases on households earning less than $400,000.
Second, the chances Congress would agree to such a plan are slim, even in the unlikely event Democrats control both the House and Senate. Biden couldn’t get centrist Democratic senators to pass his tax increases in 2022. Harris could face similar opposition and already dialed back Biden’s proposed capital-gains tax increase.
“Unfortunately, we have not been able to make the adequate changes to the tax code that we would like to have made,” said Sen. Whitehouse. “We can do better, and if voters give us a Democratic majority I think we will do better.”
Biden officials see next year’s tax debate as a crucial pivot point, and the White House has said any extension of expiring tax cuts should be paired with tax increases.
“2025 is definitely the big kind of near-term moment where we could either make things better on the fiscal outlook or make things worse,” said Daniel Hornung, deputy director of the National Economic Council.
Biden has proposed some Medicare savings through prescription drug pricing and has called for shoring up Social Security, which is paying out more in benefits than it collects in taxes. But the parties are at odds over whether Social Security taxes and benefits should increase, and that gridlock means the program likely won’t be addressed for about a decade, when its trust fund is projected to be exhausted, triggering benefit cuts.
The path ahead
Not including interest, the U.S. government will spend $1.21 for every $1.00 it collects in revenue this year. Add interest and that climbs to $1.39.
Voters often support balanced budgets in theory, but they also like the low taxes and higher spending of the past few decades. At least at some level, they prefer getting government at a discount. And politicians know that the reward for fiscal discipline can just be giving their successors more room to run up deficits.
Government revenue and spending projections for fiscal 2024, in trillions
Total revenue: $4.89 trillion
Corporate
income tax
$0.53
Individual
income tax
Payroll tax
$1.68
$2.45
$.024
Other revenue
Total outlays: $6.88 trillion
Defense
$0.85
Net interest
$0.89
All other spending
Social Security
$2.78
$1.45
Medicare
$0.90
Whether markets will allow that to happen, or instead revolt, is the big unknown.
About a year ago, Treasury yields rose after the government increased its borrowing forecasts by more than analysts had been expecting. A few Treasury auctions met with lackluster demand. Two of the three major credit ratings companies have downgraded the U.S. because of dysfunctional politics.
“It’s really the combination of high deficits, high debt level, high interest burden,” said Richard Francis, the lead U.S. analyst for Fitch Ratings, one of those companies. “And we didn’t see any willingness to tackle the big issues.”
This year, Treasury yields have fallen in anticipation of the Federal Reserve cutting interest rates thanks to lower inflation, so there’s no crisis. But even if no one knows where the red lines are, mounting debt and deficits keep inching the U.S. closer.
“There’s not some threshold but the risk goes up,” Furman said. “The higher you are, the more the risk. The thing you’re most worried about is the vicious cycle.”
At some point, maybe, the U.S. will find it difficult to borrow. At some point, interest costs may constrain policymakers. At some point, bond investors may look at the U.S. political system and decide there’s a real risk they won’t get paid back—then begin demanding higher interest rates.
For now, there’s little reason to expect a dramatic change in direction as a result of this fall’s election.
“It’s going to be a 2029, 2030 exercise,” said Schneider of Piper Sandler.
Write to Richard Rubin at richard.rubin@wsj.com
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Appeared in the September 18, 2024, print edition as 'Harris and Trump Proposals Add to Soaring Federal Debt'.
