The government will once again spend a trillion dollars more than it takes in this year. Nothing seems to stop the ever-rising debts nor the warnings that the nation is on an unsustainable fiscal track. The latest alarm comes from Congress’ own Government Accountability Office. Jeff Arkin, GAO’s director of strategic issues, joined the Federal Drive with Tom Temin to provide the details.
Interview transcript:
Tom Temin: And the latest report on the unsustainability really is old ground. But the word you’re using in this report is accelerating. Growth in the debt is happening faster and faster.
Jeff Arkin: Yeah, this is our ninth annual what we call our fiscal health report, looking at the long-term fiscal outlook for the country. And the story has really been the same this whole time that the outlook is unsustainable and that debt is growing relative to the size of the economy at a faster pace than it has even a year ago when we did this work. And so that’s where that acceleration part comes in.
Tom Temin: So debt is really the accumulation of yearly deficits?
Jeff Arkin: Right. When the government spends more than it takes in revenue, it has to issue debt to basically finance that gap. Generally speaking, it does that by issuing debt. And so we saw a deficit last year for fiscal year 2024 of $1.8 trillion and that increased by about that same amount. And so when the government spends more, it doesn’t have too much money lying around. It has to issue debt to the public to finance that gap.
Tom Temin: Right. And who holds that debt for the most part?
Jeff Arkin: It is a variety of investors, mostly domestic investors, but some foreign investors as well. And pensions can even hold them. The Federal Reserve holds a share of them as well. So it’s widespread, holding across the economy and the globe.
Tom Temin: At one time, this was many years ago, Great Britain happened to hold the most U.S. debt. Do we know what nation now does?
Jeff Arkin: My recollection is it might be UK is one of the big ones. Japan is one of the larger holders of debt. China, 2 or 3% of our debt. No single country holds a relatively large share. But it is, again, a fairly widespread security that their governments hold and investors and other countries hold.
Tom Temin: And now the report says the debt at the moment is just about $29 trillion. Put that in context with respect to the interest on the debt as a part of the budget and the debt itself in relation to the economy.
Jeff Arkin: Sure. On that latter point. Debt. And we like to compare debt to the economy because it helps really relate the size of that to the economy and makes it easier to compare over time. So right now and for the last four years or so, debt has been almost as large as the economy. So 98% of the economy, our gross domestic product, as we call it. This is up substantially from 2019 even when it was just 79%. For most of the latter half of the 20th century, it was 40-50%. So that’s where we’ve seen a big increase. And that has an impact on what you mentioned before, which is the interest that we pay on the debt. 2019, about 8% of federal spending was on interest costs. 2024, that’s up to 13%. And we project if there are changes in our fiscal policies by 30 years from now, 2054, it’ll be over 27%. And so you see an increasing share of our expenses just going to pay interest on debt that we’ve already issued to pay for all the other things that the federal government buys or services that it provides.
Tom Temin: And at this moment, the yearly debt service, how does that stand in relation to the defense budget, to the rest of the civilian operations budget and to Social Security and Medicare?
Jeff Arkin: And net interest and we call it net because the federal government does take in payments on its loans as well. Our debt is one of the largest categories this year larger than Medicare, larger than national defense. And so for 2024, it was almost $900 billion. Social Security is still quite a bit larger. But we did project that at some point in the future, interest will surpass Social Security to become the largest category of federal spending.
Tom Temin: All right. So it’s big numbers no matter how you compare it. We’re speaking with Jeff Arkin, director of strategic issues at the Government Accountability Office. And what makes it unsustainable, I guess we all sense this, but in a technical sense because you could say, well, just keep issuing debt. Crowns rested on debt throughout human history. Debt is what makes a big nation big.
Jeff Arkin: Sure. And I think the challenge is that there are risks with increasing debt and having debt take up a larger share compared to the economy and a larger share. And so you may have situations where policymakers don’t feel like they have as much flexibility to respond to economic downturns or unexpected events, something like a COVID-19 pandemic. Generally speaking, rising debt causes interest rates to rise, which can have impacts on American households who are trying to buy a car with a loan or buy a house with a mortgage. So they have real impacts. And then kind of worst-case scenario is it does increase the risk of a fiscal crisis where investors might lose confidence in the federal government’s ability to manage its finances and lose confidence in the economy, which really reduces demand for debt, at least at reasonable, at affordable interest rates. And then Treasury may be in a position where the U.S. government may not be in a position where it can’t borrow to finance those persistent deficits that we talked about before, which would cause all sorts of trouble with the economy.
Tom Temin: We’ve seen this in places like Greece in recent decades. I think it’s happened in Argentina and other South American countries. Those countries are just permanently weakened. They exist. People get up in the morning and have their lattes and so forth, but they no longer have power over their own destiny.
Jeff Arkin: Yeah, I think those are the situations that would be prudent for us to avoid. Nobody knows when we’ll reach that point where a fiscal crisis could happen and if it were to happen, well maybe it would be a long time in the future. What are main message is it’s important to recognize those risks now and develop a strategy to address them, to put the federal government on a more sustainable fiscal path.
Tom Temin: And we have now this current effort in the executive branch to put it on a sustainable path as they see it. But they’re not touching Social Security and Medicare spending. Really, it’s the congressional branch that needs to deal with that because those benefits and those systems of who gets paid how much and when is all statutory. Nobody wants to cut money going to the little old men and little old ladies now in this kind of thing. But there has been Social Security reform in decades past where they changed the future outlays and I think they call it bending the curve down so that future beneficiaries have a different deal than current ones. But Congress won’t even discuss that.
Jeff Arkin: Yeah. Social Security is one of the larger fiscal challenges and Medicare or the hospital insurance part of Medicare. These are funded through payroll taxes. They have what’s called a trust fund. For a long time, they would take in more money than they would provide in benefits. That’s changed to the point where that trust fund, which is how these benefits are paid for, will run out for Social Security in 2033, for Medicare in 2036. And at that point, there’s just not enough money coming in to pay for full benefits. There have been reforms in the past. In the mid-80s with Social Security, there were some large reforms that extended the life of the trust fund. But if Congress and the administration don’t do anything with these, they will not have enough money to pay for benefits in the not-too-distant future at that point.
Tom Temin: So they become pay-as-you-go, which in effect, they really are now. I mean, aren’t the trust funds kind of a accounting nicety in the same way that your account is an accounting nicety, but it’s a pay-as-you-go?
Jeff Arkin: It is a pay-as-you-go and then the trust funds have extra balances to be able to make up the difference from the amount of money that’s coming in through payroll tax, through Social Security and Medicare taxes and the amount of benefits every year. And then once that trust fund is depleted for either of those, you won’t have enough money, barring some type of legislation, to make everybody whole.
Tom Temin: Thinking people read your report and know what’s going on. It’s just arithmetic, essentially, and are horrified. But what about the members? I mean, this report you say is 9 years old lands with a big thud in some quarters, but Congress merrily goes along ignoring it. Administrations, come and go, ignoring it or saying we’re not going to touch those things but they have to be touched. So if they don’t get touched, then the result is national disaster at some point in our lifetimes. I’m asking you leading questions. I understand. But this happens to be a pet subject of mine.
Jeff Arkin: Yeah. This is one of the key issues or key challenges facing the country. It’s the reason why we issue this report every year. And I think what we’re trying to do is get that message out there and make the point that this can potentially have an impact on Americans, on people who live in this country with, again, interest rates going up. That has an impact on individuals and has an impact on businesses. Being able to invest, has an impact on productivity. It has an impact on wages. It sounds like an abstract concept when we talk about it in big numbers and percentages. But this really does have an impact and can have an impact on the American people. And the longer that we wait to address it, the more severe some of the changes will need to be on the spending or tax or both sides to address it.
Tom Temin: It’s also, just to wrap up here, a potential national security concern because if we can’t pay for what’s needed to protect us and the rest of the world, then nobody else will.
Jeff Arkin: It’s absolutely a national security concern. It affects all parts of our government and of the country.
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