The Federal Spending Spree Will Make the Next Economic Shock Even Worse
Growing federal debt hobbles the government’s ability to respond to crises.
You're probably tired of hearing about the U.S. government's looming debt crisis, because it's a continuing backdrop to political conversations in this country. Unfortunately, the government's debt problem comes up so often because most politicians do very little to address the issue. Year after year, they spend more than the government collects in revenue. A new report cautions that growing federal debt not only guarantees a day of reckoning but hobbles chances of fixing the situation.
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The Federal Government Will Face the Next Crisis Burdened by Debt
"The U.S. has never experienced an economic shock as indebted as we are today," notes the Committee for a Responsible Federal Budget (CRFB) in a paper published March 10. "Unfortunately, the U.S. has far less capacity to address the next shock than it has previously. The national debt increased by a combined 65% of Gross Domestic Product (GDP) over the past two recessions and recoveries, with the federal government entering them with debt at 35% and 80% of GDP, respectively. Today, debt totals 100% of GDP—only a few percentage points from the previous record set after World War II. This situation leaves the U.S. immensely vulnerable."
The CRFB previously addressed what that next shock might look like in a January paper. It considered several scenarios, including a financial crisis in which reduced confidence in U.S. Treasury markets leads to a spike in interest rates, inflation resulting from efforts by the government to monetize (devalue the dollar) its way out of trouble, austerity caused by harsh tax increases and tough spending cuts, overt default on the debt, or a long-term, gradual national slide into poverty—something like Argentina before Javier Milei's presidency. You could also see a combination of these effects, because crises are rarely neat and clean.
"The United States is deeply indebted, and its finances are on an unsustainable long-term trajectory," the January paper concluded. While forecasting trouble ahead if debt is left unaddressed, the paper didn't specify when the crisis might materialize.
Economists with the Penn Wharton Budget Model (PWBM) were more willing to place the federal government's debt woes within a timeframe in a 2023 analysis. "We estimate that the U.S. debt held by the public cannot exceed about 200 percent of GDP even under today's generally favorable market conditions," they wrote, though they considered 175 percent a more plausible ceiling. "Under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation)."
That 20-year period was the authors' "best case" scenario. They cautioned that if financial market participants lose faith that the federal government will eventually address its debt problem, the grace period could be substantially shortened.
Federal Debt Is Wildly Underestimated
Interestingly, the authors of that PWBM analysis, Jagadeesh Gokhale and Kent Smetters, separately wrote in January 2025 that federal debt is wildly underestimated. While the U.S. Treasury currently puts national debt at $38.9 trillion ($31.2 trillion if you just count debt held by the public rather than money the government owes itself), they say that unfunded Social Security and Medicare obligations need to be considered as part of the full picture: "Adding explicit debt ($26.2 trillion) and implicit obligations ($65.7 trillion) brings total federal indebtedness to $91.9 trillion, or 340% of 2023 GDP."
Last week Smetters, the faculty director of PWBM and a former deputy assistant secretary for economic policy at the U.S. Department of the Treasury, told Fortune's Nick Lichtenberg that the full sum of national debt is now closer to $100 trillion.
Incidentally, the U.S. Treasury quietly acknowledges the dramatic shortfall for funding Medicare and Social Security. While it puts the shortfall at varying figures depending on assumptions and timeframes, unfunded obligations are never estimated at less than tens of trillions of dollars. The Treasury warned in 2024 that "this need can be satisfied only through increased borrowing, higher taxes, reduced program spending, or some combination." That funding gap isn't reflected in official debt figures.
A Short List of Possible Remedies
The Treasury's proposed solution of borrowing, taxes, and spending cuts reflects CRFB's thinking on the matter, too. In what they call a "Break Glass Plan" the authors recommend that additional short-term borrowing to address the next crisis should involve "offsets that generate two dollars of savings for every one dollar of near-term support." They also call for a budget mechanism that "would freeze the indexation of most tax and spending parameters, impose a nominal freeze on appropriations levels, and phase in a deficit reduction surtax." CRFB also wants a bipartisan commission to "make specific recommendations to lower health care spending, cap discretionary appropriations levels, reform the tax code, restore solvency to Social Security and Medicare, reduce fraud and abuse, cut wasteful spending and tax breaks, and/or reform the budget process."
If you're rolling your eyes at the word "bipartisan" in the current political environment and wondering how yet another commission will produce any substantial fixes for how Congress goes about the business of spending taxpayer (and borrowed) money, you're not alone. It's very difficult to imagine legislators working together to make hard choices about spending less, offsetting borrowing, and taxing more. It's also very difficult to imagine higher taxes would contribute to fiscal discipline. Spending consistently grows faster than revenue increases.
"Since Congress last balanced the budget in 2001, revenues have grown at a robust annual average rate of 3.9 percent, which was higher than the average inflation rate since 2001, 2.5 percent," the Cato Institute's Chris Edwards pointed out in 2024. "The problem is that spending has grown at a much faster pace, 5.5 percent annually, which has led to today's large deficits."
Higher taxes are more likely to fuel increased spending than to help eliminate deficits and pay down the federal debt. That means even more pain; the Congressional Budget Office estimates "the economic cost of a dollar of tax revenue range from 20 cents to 60 cents over and above the revenue raised." Short-term borrowing might help address an immediate crisis, but it also means more debt to be repaid.
Ultimately, the federal government needs to spend less—much less. But when have legislators ever agreed to rein in the shopping spree? In truth the solution to the next economic shock is unlikely to be selected after calm deliberation. It'll be forced on the government by raw necessity.
