Economic Growth with Less Debt

COMMENTARY Debt

Economic Growth with Less Debt

Mar 14th, 2017 2 min read
COMMENTARY BY
Romina Boccia

Deputy Director, Thomas A. Roe Institute

Romina is a leading fiscal and economic expert at The Heritage Foundation and focuses on government spending and the national debt.
President Trump and the congressional leadership can introduce budgets that significantly reduce the size and scope of government. Photo: iStock

Key Takeaways

High and rising federal debt is a key contributor to sluggish economic growth.

The nation must honor its debt and the interest payments on it.

Washington can help unleash growth by acting to control spending before increasing the debt limit again.

Remember the debt limit? It’s back, and it matters.

High and rising federal debt is a key contributor to sluggish economic growth and to lost opportunity for the American people. But Washington can help unleash growth and expand opportunity by acting to control spending before increasing the debt limit again.

The debt limit is an alarm bell. It should motivate Congress and the president to agree on a spending reduction strategy that puts the federal budget on a path to balance. Instead, Congress voted to silence the alarm, suspending the limit in November 2015.

This week, with the national debt closing in on $20 trillion, the suspension expires. Deficits are projected to add more than $9 trillion to the debt over the next decade, and that’s assuming no tax relief and no additional spending for defense, border security and infrastructure — all things that President Trump has promised.

The nation must honor its debt and the interest payments on it. But we now know that Treasury can prioritize these payments during any debt limit impasse — after all, Obama’s Treasury Department was prepared to do just that in 2013, even though it insisted publicly that it couldn’t.

Rather than triggering default, hitting the debt limit should trigger serious discussion in Congress and the White House about how to rein in the nation’s overspending effectively and humanely. The only way the federal government can avoid real default on its obligations in the future is to begin controlling spending and debt today.

Some suggest that the U.S. government need never default, because it can always direct the Federal Reserve to “print our way out of debt.” Tell that to Venezuela. Or to the Weimar Republic. This nonsolution overlooks the fact that default on the value of money by currency deflation is simply default by another means.

Just as families cannot spend beyond their means indefinitely, so too the federal government must learn to live within reasonable spending limits. Before taking out another credit card, members of Congress and the executive branch should gather round the kitchen table and hash out spending priorities and budget cuts best calculated to improve the U.S. fiscal outlook.

They have several months to agree on a detailed plan. Even though the debt limit returns this week, Treasury will likely be able to continue borrowing until this fall; possibly all the way through September.

An array of debt-limit loopholes, called extraordinary measures, allows Treasury to borrow from other accounts that are exempt from the debt limit. There is nothing really extraordinary about these measures any more, though. Resorting to these measures has become a regular occurrence, weakening the debt limit’s binding force and enabling Treasury to use its discretion to select the most opportune moment to schedule a debt-limit showdown.

The current fiscal path the nation is on is highly unsustainable and demands urgent reform.

Congress’ official number-crunchers, located in the Congressional Budget Office, have repeatedly warned that such high and rising debt dampens economic growth and could bring about a financial crisis where investors lose confidence in the U.S.’ ability to honor its financial commitments. Such debt also presents an economic and security crisis risk, by reducing congressional flexibility to maneuver during a crisis.

But President Trump and the congressional leadership can lead us away from that by introducing budgets that significantly reduce the size and scope of government. And, yes, that means starting to reform federal health and welfare programs — the so-called “mandatory spending” programs that are driving spending growth and debt. America’s fiscal future depends on them.

This piece originally appeared in The Washington Times