Pew Study Finds Curbing Federal Debt Easier with Both Spending Cuts and Tax Hikes

A new study by the Pew Fiscal Analysis Initiative projects that without significant revenue increases or spending reductions, the federal debt will climb to the unprecedented level of 132 percent of annual gross domestic product (GDP)—or $54 trillion—by 2035.  Some policy makers suggest that the solution to this alarming trend is to simply raise taxes without cutting spending, while others argue the opposite. No Silver Bullet: Paths for Reducing the Federal Debt, illustrates the difficulty of solving the nation's debt problem by relying exclusively on any single approach. 

“The federal debt is on a dangerous trajectory. Without policy changes, we risk significant damage to the long-term health and well-being of our economy,” said Ingrid Schroeder, director of the Pew Fiscal Analysis Initiative. “Lawmakers need to know how difficult it would be to solve the problem without following a multi-pronged strategy that includes changes in both spending and revenue.” 

As a share of GDP, the federal debt is now three-quarters higher than what it was a decade ago and, in the next 15 years, Pew projects it will reach 95 percent of GDP, the highest level since 1947. Without action, that number will continue to rise to unsustainable levels. 

No Silver Bullet also investigates what it would take to reach a debt-to-GDP ratio of 60 percent by 2025. The Peterson-Pew Commission, International Monetary Fund, the European Union and others have identified the 60 percent threshold as a reasonable debt target.  The report considers what it would take to reach the 60 percent target by 2025 without a multi-pronged strategy, assuming that policy makers take action beginning in 2015 (when unemployment is expected to return to a normal level). They include: 

• Only cutting discretionary spending. The United States would have to cut discretionary spending by 43 percent, or about $590 billion in 2015, a figure roughly equivalent to eliminating the Department of Defense. 
  
• Only cutting entitlement programs. The United States would have to cut entitlement programs (such as Medicare, Social Security, Medicaid and certain veterans' benefits) by 22 percent, thus reducing the average Social Security benefit from $1,255 per month to $985 per month in 2015.
  
• Cutting a percentage of all federal spending. An across-the-board cut would have to reduce spending on all government programs by 14 percent. 
  
• Only raising income taxes. Reaching the debt target with just a tax hike would require a 32 percent increase in individual income tax revenues. That would boost the average income tax liability for every man, woman and child in the U.S. from $4,955 to $6,520 in 2015. 

In contrast, the report finds that an approach combining both spending and revenue policies would require an across-the-board tax increase and spending cut of about 7.5 percent each in 2015 to achieve the target debt-to-GDP ratio by 2025.