Panel, Conference Presentation
Balance Sheet: The US Government Budget and National Debt | Global Conference 2025
Milken InstituteJosh Barro, Maya MacGuineas, Steven T. Mnuchin, Paul Ryan, Alan Schwartz, Phillip Swagel, David Malani
- Budget deficits are projected to rise further before declining, potentially adding one percentage point of GDP from the 2017 Tax Act extension, with deficits reaching 8% of GDP if GDP growth slows by one percentage point.
- Long-run real economic growth is forecast at approximately 2% due to demographics, though optimism exists for a return to 3% growth within a year; achieving a 3% deficit target requires roughly $7.5 trillion in savings over the next decade.
- The administration aims to reduce the deficit by approximately one percentage point annually and restore growth to 3%, with potential savings from spending cuts, tariffs, and AI-driven healthcare cost reductions, though significant work remains.
- Current reconciliation efforts are estimated to yield net savings of $1.7 trillion to $2 trillion, significantly less than the potential $2.8 trillion if new defense and immigration spending were excluded, with expectations that major entitlement cuts to Medicare, Social Security, or the military will not occur.
- Debt-to-GDP ratios are expected to reach record post-World War II levels within four years, while the U.S. may borrow approximately $22 trillion over the next decade if no further action is taken.
- Social Security and Medicare are projected to become insolvent within roughly a decade (specifically 2033 for Social Security trust funds), potentially necessitating benefit reductions of about 25% for future retirees or structural reforms for those under 60.
- Interest payments are forecast to be the fastest-growing budget item and may crowd out other priorities, serving as a catalyst for policymakers to act if interest rates remain high or rise further.
- Treasury auction failures are a potential risk that could occur at an uncertain time, potentially forcing the Federal Reserve to intervene or triggering urgent "budget surgery" to stabilize bond markets.
- Foreign central banks may increasingly hedge against the dollar through alternative bilateral agreements and gold, though the U.S. dollar remains the primary reserve currency due to a lack of alternatives, with stablecoin legislation expected this summer to aid digitization.
- Fiscal adjustment is anticipated to occur either through crisis triggered by bond markets or via a "fiscal commission with teeth" that mandates votes without amendments, as political paralysis and populism currently hinder entitlement reform.
- Proposals for revenue generation include implementing a VAT to broaden the tax base without overburdening a shrinking workforce, or extending expiring individual tax provisions to protect pass-through businesses.
- Political barriers include a lack of bipartisan appetite for entitlement reform, with Republicans seeking revenue before spending cuts and Democrats demanding the reverse, while structural changes are viewed as necessary for those "60 and below."
- Growth strategies involve infrastructure investment in AI to boost productivity, immigration reform to increase the working-age population, and tax reforms exempting savings and investment to potentially raise revenue to 20% of GDP.