Federal Debt Should Be Reduced to 70% of GDP

NEW YORK, Feb. 9, 2023 /PRNewswire/ -- Reining in the ballooning public debt and returning it to a responsible debt-to-GDP level must start now. Driving the urgency is that it will take 20 to 30 years of a sustained effort to draw the debt-to-GDP ratio down from 95% to a responsible 70% with the least draconian fiscal hardship, according to a new analysis from the Committee for Economic Development, the public policy center of The Conference Board (CED).

The projection is detailed in CED's new Solutions Brief, Debt Matters: A Road Map for Reducing the Outsized US Debt Burden to 70% of GDP, which is the latest study in CED's Sustaining Capitalism series.

Released today, the study explains how rising interest rates and the looming threat of a recession are intensifying the national debt crisis, what fiscal policies are necessary to reduce the debt-to-GDP ratio to 70%, why it will take two to three decades, and includes policy recommendations for achieving that goal so we can return to a path of fiscal health and stability. 

As detailed in the report, high levels of debt can diminish economic growth. Rising debt service costs will consume the discretionary budget, crowding out all other priorities; cause higher interest rates and borrowing costs for public and private sectors; weaken investment; and erode the standard of living. 

Most immediately, CED's recommendations advocate raising or suspending the debt ceiling to avoid a fiscal crisis, particularly at this time, when the economy is fragile. That decision should be linked to the immediate establishment of a bipartisan National Commission on Fiscal Reform and Debt Reduction, with a road map that will achieve debt reduction.

The analysis and recommendations come at a time when the debt-to-GDP levels are projected to reach 185% by 2052 and fiscal restraint is more important than ever before. The US and global economies have been battered by two global shocks: the COVID-19 pandemic and the Russian invasion of Ukraine, which have further compromised our nation's fiscal health, leaving us with even higher debt, high inflation, rising interest rates, and a possible recession. 

"Debt matters. An urgent and determined change of course must be undertaken without delay. The combination of high inflation, high interest rates, and an already outsized debt turn inflation and rising interest rates into an accelerant, more quickly stunting economic growth, and moving the nation faster toward an economic crisis," said Dr. Lori Esposito Murray, President of CED. "Rising interest rates make it clear there is no time to lose on this priority. Fixing the budget and reducing the debt will be challenging and will take a decades-long commitment. It is far wiser to act now than wait and suffer an even more cataclysmic fiscal crisis."

The Solution Brief is supplemented by a Tool for Debt Reduction, allowing the public to create different scenarios to achieve a 70% ratio of debt-to-GDP by adjusting the tax rate and outlay cuts.

Key Recommendations from the Solutions Brief
To get us on the path to a more stable debt-to-GDP ratio of 70 percent and return to fiscal health, CED recommends the following policy solutions be undertaken immediately:

Avert a debt ceiling crisis and establish a Bipartisan Commission on Fiscal Reform/Debt Reduction

• Congress should remove consideration of the debt ceiling from a last-minute, volatile political battle that will threaten economic recovery and link that decision to the commitment to immediately establish a new bipartisan National Commission on Fiscal Reform and Debt Reduction.
• It should also include a roadmap to put the US on a binding path to achieve the reduction of the US debt-to-GDP ratio to 70%.

Prioritize fiscal restraint

• Government must cut spending where possible, avoid stimulus, and focus to promote work and productivity, i.e., investment in R&D, education, infrastructure, and support for private investment.
• The net savings necessary to reverse the growth of the ratio of the debt to the GDP should be tallied alongside the cost of new spending in budget bills.

Reform Medicare/health care policy

• Federal health spending is the biggest long-term driver of costs, and the Medicare Trust Fund is expected to reach insolvency in 2028. Reform the Medicare/health care system by giving incentives for consumers to limit costs and for providers to deliver the best results rather than the most services and by focusing on prevention programs.
• Improve efficiency in the health care sector, also by making permanent pandemic regulatory improvements, especially in telehealth, licensing, accelerated development of treatments, and increasing the use of technology and data.

Save Social Security

• To restore Social Security and avoid its Trust Fund reaching insolvency, consider broadening its portfolio to include higher retirement ages, a broader payroll tax coverage for workers with higher wages/generous fringe benefits, higher-yielding financial instruments, removing work disincentives for retirees, and a reduction in benefits for more well-off workers.

Remove budget gimmicks/pay for new initiatives

• New programs should be fully paid for without the use of budget gimmicks—for example, minimizing their cost by building in unrealistic end-dates for programs. Similarly, identify real budget savings, not just unspecified future spending cuts.
• Congress must execute a complete annual appropriations process and an annual budget resolution that takes the debt problem into account and uses the reconciliation process only for deficit reduction.

Tax reform

• Increase tax revenues through tax reform aimed at reducing preferential treatment. Use the opportunity to clean up the tax code by streamlining the existing system, making it simpler, and turning it away from picking winners and losers as it does today.

Streamline regulation

• Reduce unproductive roadblocks without jeopardizing safety. Adopt pro-growth regulations that neither impede nor favor any particular sector. Continually review current regulatory requirements which are outdated, redundant, or create expensive and non-productive activities.

Segregate the debt

• Given the debt burden's overwhelming size and the dedicated time needed to address it, Congress should also consider addressing it in segments, i.e., addressing pandemic debt as a first-order priority and separating out the large incremental addition to the public debt resulting from the COVID-19 pandemic: roughly $5.3 trillion from specific relief bills, plus about $1.3 trillion from economic losses.

Develop a realistic energy transition policy

• The transition to clean energy will require additional investment and transition costs that will need to be compatible with the deficit and debt reduction goals. To avoid economic disruption, strategically plan with the private sector for a realistic, reliable energy transition and the fiscal tradeoffs that will be required to achieve the net-zero objectives. 

The new Solutions Brief, Debt Matters: A Road Map for Reducing the Outsized US Debt Burden to 70% of GDP, can be accessed here.

About CED
The Committee for Economic Development (CED) is the public policy center of The Conference Board. The nonprofit, nonpartisan, business-led organization delivers well-researched analysis and reasoned solutions in the nation's interest. CED Trustees are chief executive officers and key executives of leading US companies who bring their unique experience to address today's pressing policy issues. Collectively they represent 30+ industries, over a trillion dollars in revenue, and over 4 million employees. www.ced.org    

About The Conference Board
The Conference Board is the member-driven think tank that delivers trusted insights for what's ahead. Founded in 1916, we are a non-partisan, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States. www.conference-board.org

SOURCE Committee for Economic Development of The Conference Board (CED)