Why the US Needs a Fiscal Commission to Help Solve the Debt Crisis

The US House Budget Committee recently held a hearing on the need for a fiscal commission to address rising debt and deficits. After being reminded of the severity of the problem, including that interest on the debt already exceeds defense spending and that debt as a share of GDP is quickly approaching the highest level ever, many lawmakers wondered how much time is left before we have a debt crisis that involves much higher interest rates or inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin or both.  

That’s the right question, and a healthy indication that at least some members of Congress are concerned about the problem. However, the timing of any potential debt crisis, and what that may look like, is difficult to pin down with any precision, though many economists have tried. The key variable, and one that is most difficult to predict, is the degree to which future governments grow increasingly concerned about high debt levels and debt-service costs such that they enact deficit-reducing legislation. That is, the answer depends on lawmakers themselves. 

Recent studies provide some guidance based on the historical experience in the US and other countries. On the pessimistic side, a few studies find evidence of “fiscal fatigue,” whereby governments initially reduce deficits in response to rising debt-to-GDP ratios but then eventually reach a point, somewhere around debt of 150 percent of GDP, after which they are less responsive and debt climbs rapidly toward a crisis. The underlying dynamics appear to be on vivid display in France, where government debt is approaching 120 percent of GDP and rapidly growing, yet no major party seems to be able to address it. Mark Warshawsky at the American Enterprise Institute estimates the US could reach this fiscal fatigue threshold sometime within the next 15 years under current trends.  

On the optimistic side, a recent study indicates that while debt as a share of GDP is not a strong trigger for fiscal adjustments, governments react when interest costs rise as a share of GDP. Based on more than 200 years of US history, the study finds that a 10 percent increase in debt-service costs leads to a 2.8 percent increase in the primary budget surplus (excluding interest costs). Data for 12 other advanced countries indicate a similar though smaller effect: a 1.35 percent increase in the primary surplus in response to a 10 percent increase in debt-service costs. The study shows the effect is particularly strong when interest rates are high relative to economic growth, consistent with other studies finding this factor (sometimes referred to as “r – g”) is a key determinant of debt sustainability. 

These results imply that the recent rise in interest rates on Treasuries and the extent to which that continues should spur US lawmakers into action to reduce primary deficits, particularly if the economy slows. With interest rates returning to relatively high levels that last existed around the turn of this century, we can expect lawmakers to be more engaged with efforts to reduce the debt and to eventually make progress returning to that era’s better fiscal outcomes, when the federal budget was last in surplus. Furthermore, interest on the debt as a share of GDP is now at approximately the record-high levels that last occurred in the early 1990s, a decade that included several major efforts to reduce deficits.

This brings us to the main topic of the hearing: the need for a fiscal commission. The conclusion of the witnesses, including former Defense Secretary Leon Panetta and former Senators Rob Portman and Joe Manchin, and most members on the Committee, was that a bipartisan fiscal commission, composed of select members from both parties, represents the most promising avenue to enact major legislation that reins in deficits and debt. That is because lawmakers understand that the current budget process does not allow them to effectively address budget challenges comprehensively on both the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. and spending side. 

The current budget rules, which were mainly established in the 1974 Congressional Budget Act, are increasingly unfit for the modern federal budget. Most problematic, the current rules put most of the budget out of reach, exempting from regular congressional review the mandatory health care and old-age entitlement programs that are the largest and fastest-growing part of the budget. A fiscal commission would give lawmakers a license and a forum to focus on these and other problematic parts of the budget, establish basic facts about the drivers of the debt and the trade-offs of various solutions, and negotiate adjustments to spending and taxes that would put the budget on a more sustainable trajectory.  

Witnesses discussed lessons learned from past fiscal commissions, such as the 2010 Simpson-Bowles Commission, recommending that a successful outcome is most likely if the commission is statutory and has buy-in from leaders in both parties. Another aspect that Senator Portman emphasized is education, noting that the work of the commission, including expert analysis and the attention it receives, would serve to educate the public on the major drivers of the debt, the problems associated with leaving it unaddressed, and what can be done about it. 

Several members in both the House and the Senate from both parties support legislation to establish a fiscal commission. The Fiscal Commission Act (FCA) would establish a commission composed of 16 members, including 12 members of Congress and four outside experts appointed by congressional leadership. An important feature of the FCA is that it sets clear and achievable goals, tasking the commission with recommending ways to stabilize the debt-to-GDP ratio at or below 100 percent by fiscal year 2039 and improve the solvency of the major federal trust funds for Social Security and Medicare. Another important feature is that once the commission approves a plan, Congress would be required to vote on it without amendment and without delay. 

A fiscal commission is a specific solution to the general problem of an increasingly dysfunctional budget process, providing a sort of shock therapy to put the federal debt and the major entitlement programs on a sustainable course. Other legislation, such as the Comprehensive Congressional Budget Act, would overhaul the budget process, so that members would be required to annually review the entire budget, including mandatory spending and tax expenditures. Ultimately, both approaches are needed, and a fiscal commission itself could take up budget process modernization. To the extent that these and similar efforts advance, it would be a sign that Congress is finally starting to get the country’s fiscal house in order.