The timing could not have been worse. The national debt of $31.4 trillion has reached its authorized limit. Inflation of nearly 5% has reacted stubbornly to the Federal Reserve’s liquidity tightening and interest rate increases, and the paradox of the increase in May 2023 posted jobs by employers to 10.1 million came with biggest jump in unemployment since 2020 to 3.7%.
Furthermore, the Gross Domestic Product (GDP) for the 1st quarter of 2023 fell by 1.3% and has been falling since the 3.2% decrease in the 3rd quarter of 2022. Corporate profits are no different, having fallen by 4.6% during the 4th quarter of 2020 and by 2.0% in the 1st quarter of 2023. Both GDP and corporate profits are expected to fall once again during the 2nd quarter of 2023.
In this unstable, struggling, and inflationary economy, the nation’s bills were piling up and the debt ceiling needed to increase to pay what we owe. The debt limit had to be increased. The trick was to do this without increasing inflation, the national deficit, and interest rates.
The federal government could not make the economy worse than it is by increasing the federal budget deficit, which places upward pressure on interest rates, often impacting private investment. Spending had to be reigned in. Not easy since increased federal spending contributed to inflation. Consider the fiscal 2022 budget that spent $1.38 trillion more than the $4.9 trillion in revenues collected. Cutting spending is easier said than done.
For example, approximately 61% of the federal budget is for mandatory spending for Social Security, Medicare, and Medicaid. Discretionary spending, where the cuts had to come from, amounted to 30% of the budget, half of which goes for defense. The remaining goes for education, social services, transportation, veterans, justice, international affairs, the environment, science, space, and technology. The remaining 9% pays the growing national debt and interest.
Sure, debt limits were always increased in past years without any spending cuts. However, these times are different and require a fiscal policy that works in partnership with the Federal Reserve’s monetary policy to bring down inflation. To do this, the president and Congress had to agree that spending had to be curbed in tandem with increasing the national debt.
Compromise was in the air. The 2024 congressional and presidential elections neared and nobody wanted to explain to the American voter why a country with over $26 trillion in GDP could ever default on its debt, couldn’t throttle inflation, or worse, was dragged into recession. So, compromise they did.
The debt limit was temporarily suspended until Jan 1, 2025, after a president and Congress would be elected. Discretionary spending would be capped for 2024 at 2023 levels and limited growth in the 2025 federal budget to 1%. There would be claw-back of $30 billion unused COVID-19 monies previously appropriated as well as reducing the $80 billion appropriated to the Internal Revenue Service by $20 billion.
Curbing spending and controlling growth of the federal debt was essential. The United States has the fourth highest debt-to-GDP ratio in the industrialized world behind Japan, Italy, and Greece. Our national debt is projected to be twice our GDP by 2051.
The time to act couldn’t have been better.
Martin Cantor is director of the Long Island Center for Socio-Economic Policy and a former Suffolk County economic development commissioner. He can be reached at [email protected].
Image and article originally from libn.com. Read the original article here.