America’s Perilous Fiscal Path

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Author: ALAN J. AUERBACH, Professor of the Graduate School, Robert D. Burch Professor of Economics and Law, Emeritus, and former director of the Burch Center for Tax Policy and Public Finance, at the University of California, Berkeley.
Central thesis: It is easier to explain how the United States accrued its current fiscal difficulties than to predict or outline how it will exit them.

1990 baseline:
- US public debt stood at 43 percent of gross national product (GNP).
- Unemployment rate exceeded 5 percent.
- Congressional Budget Office forecast deficits would fall from 4.0 percent to 1.8 percent of GNP over the following five years.
- Bipartisan agreement produced tax increases and spending cuts projected to save nearly $500 billion over five years.
Recent episode:
- In July 2025, US debt approaching 100 percent of gross domestic product (GDP).
- Unemployment just over 4 percent.
- Deficits projected to rise from 5.5 percent to 5.9 percent of GDP by 2030.
- Passage of the One Big Beautiful Bill Act at a cost of about $2 trillion over the next five years.
Long-run observations:
- Some project that the US debt-GDP ratio will nearly double in size over the next three decades.
- The absence of a large postwar “peace dividend” and demographic pressures (expansion of old-age entitlements) increase spending pressures.

Two major economic shocks:
- The global financial crisis.
- The COVID-19 pandemic.
- Result: revenues fell and spending rose as large fiscal stimulus packages were deployed.
Political polarization:
- Bipartisan compromise historically key to consolidation; current polarization makes such agreements unlikely.
- Parties disagree on tax increases versus spending cuts; no prospect of bipartisan attempt comparable to the Simpson-Bowles Commission is apparent.
Subtle economic costs that weaken urgency:
- Lack of immediately observable damage has reduced political pressure to consolidate.
- Empirical evidence links higher national debt to higher interest rates, but other factors pushed interest rates steadily lower until recently.

Debt and interest interaction (2001–2021):
- US debt-GDP ratio more than tripled over this period.
- Debt service as a share of GDP fell from 2.0 percent to 1.5 percent.
Current trajectory concerns:
- Debt service has begun growing sharply again.
- The rise in debt has increased the US external imbalance and potentially crowded out productive domestic private investment.
Social insurance trust funds:
- Social Security and Medicare trust funds are projected to be exhausted within the next decade, creating legally mandated benefit-reduction risk without policy action.

Gradual path:
- National debt and interest rates continue to rise.
- Debt service consumes an increasing share of government revenues, squeezing other spending.
- Political opposition to reform might weaken over time, enabling compromise; alternatively, borrowing could accelerate to avoid cuts.
- Possible policy responses if trust funds near exhaustion: tax increases, benefit cuts, or both (as in 1983); or bailouts through additional borrowing.
Sudden path:
- Current trajectory continues until borrowing becomes prohibitively expensive and market access deteriorates.
- Such a sudden crisis appears distant given current global conditions and the US’s relative safe-haven status, but it remains a possible outcome if reforms are not enacted.

Bipartisan agreement is crucial for credible fiscal consolidation; absence of such agreement undermines feasible solutions.
Policymakers face trade-offs among:
- Tax increases.
- Benefit cuts to old-age entitlements.
- Increased borrowing to defer adjustment (politically more likely given recent behavior).
Urgency stems from:
- Rising debt-GDP trajectory.
- Impending trust fund exhaustion within the next decade.
- Potential erosion of fiscal space to respond to future large shocks.

America’s Perilous Fiscal Path — ALAN J. AUERBACH, F&D Magazine

America's Perilous Fiscal Path
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