House Committee on Oversight Subcommittee on Economic Growth, Energy Policy, and Regulatory Affairs

^*The opinions expressed herein are mine alone and do not represent the position of the American Action Forum.  I am grateful to Jordan Haring, Brian Faughnan, Angela Kuck, and Sarah Smith for their assistance. All errors are my own.

Chairman Burlison, Ranking Member Frost, and members of the Committee, I am honored to testify on issues related to the federal debt. I would like to make three main points:

• The high level of federal debt, even relative to gross domestic product (GDP), stems from structural imbalances and the failure of congresses and administrations to unwind large budgetary responses to significant emergencies;
• Deficits and debt impose a cost as a headwind to economic growth, but as they mount, they ultimately threaten economic and financial stability;
• A successful strategy to control the debt will employ pro-growth reforms to taxes, mandatory spending programs, and regulations.

Let me discuss each in turn.

Factors in the Growth of Federal Debt

Federal deficits have averaged 5.3 percent of GDP since 2000. Business as usual for the federal government is to spend $7 trillion, raise $5 trillion in taxes, and borrow $2 trillion. Of that $2 trillion, roughly one-half is interest on previous borrowing, with the result that interest expense is the fastest growing spending item in the budget.

A $2 trillion deficit when the economy is at full employment reflects a structural mismatch between spending and revenues. In particular, mandatory spending has come to dominate the budget. Annual appropriations are 25 percent of spending, interest is 15 percent, and mandatory spending is the large majority and growing rapidly.

In particular, Social Security and Medicare will constitute more than one-half of all non-interest spending over the next 10 years. Even more daunting is that they will grow quite rapidly: 5 percent annually for Social Security and 7.0–7.5 percent annually for Medicare. In contrast, revenues will grow roughly at the same pace as nominal GDP – an upper bound is 4.5–5.0 percent over a 10-year period. In short, as the budget is currently structured, the deficits will widen and the debt will rise as time passes. The fiscal trajectory is unsustainable.

The debt is now 100 percent of GDP – comparable to the previous peak at the end of World War II – and also reflects large, emergency budgetary responses to the financial crisis, Great Recession, and Covid-19 pandemic.

Obviously, budgetary matters have not always had the same patterns as in the 21^st century. From 1960 to 2000, deficits averaged only 2.3 percent of GDP. Policymakers were keenly attentive to fiscal policy, and widening deficits elicited prompt responses. Wars, recessions, and other emergencies also occurred in the 20^th century, but fiscal policy was set to unwind the emergency debt accumulation. This attention to budgetary matters resulted in four consecutive federal budget surpluses at the turn of the century.

Costs of Excessive Debt Accumulation

The excessive debt accumulation in the past quarter century has budgetary, economic, financial stability, and national security consequences. The large amount of debt and interest costs produces budgetary inflexibility. Interest must be paid in a timely fashion, limiting the ability of Congress to change spending to meet new demands.

On the economic front, the fact that the federal government is borrowing $2 trillion each year means that those dollars are not available to finance college or advanced degrees, for additional training for workers, new software, factory expansion, mergers and acquisition, capital investment, or any of the myriad ways to enhance productivity. Slower growth in productivity translates into slower growth in real wages and GDP.

The United States is already paying a price for the high level of debt. The growth in GDP per capita – a crude measure of the standard of living – has grown a full percentage point slower in the 21^st century than in the 20^th century, with the result that it now takes 56 years for the standard of living to double compared to the 29 years in the 1960–2000 period. The cumulative loss of income per person is the foundation of the affordability crisis. Better growth would provide the resources to meet many more needs of U.S. households.

Continuing on this trajectory will exacerbate these headwinds to growth and slow the growth of federal revenues at the same time. Ultimately, global lenders will demand higher interest rates to compensate for the risk that the United States fails to make payments in a timely fashion. The cycle of higher rates, slower growth, slowing revenue growth, and greater debt accumulation cannot be maintained. Lenders will cut off the United States., and in the resulting economic crisis there will be forced cuts in spending and draconian tax increases. The domestic and global financial systems will be in disarray.

Finally, the United States now spends more on interest than national security; a rule of thumb among historians is that no nation can mismanage its finances like this and remain a great power. The damage to the economy will sap the United States’ ability S. to defend itself and project our values around the globe.

Elements of a Strategy to Control the Debt

Any successful strategy to control the growth of federal debt in the future will involve entitlement reform, a significant reduction eof waste and fraud, tax reform, and regulatory reform. Let us consider these in turn.

Entitlement reform. Mandatory spending – entitlements – are the majority of federal, non-interest spending over the next 10 years. These programs will grow faster than other elements of spending – 5.1 percent and 6.5 percent per year, respectively. More important, they will grow more rapidly than federal revenue (4.0 percent per year).

As a rule, revenue will grow at roughly the pace of nominal GDP. Accordingly, one could raise taxes and temporarily narrow the deficit. But revenue would return to the 4.0-percent pace. In the absence of changes to Social Security and Medicare, spending growth would continue to outstrip revenues, deficits would widen, and the debt accumulation would return. There is simply no durable debt fix without reforms that cause Social Security and Medicare to grow closer to the rate of nominal GDP.

Of course, there is no reason that the remainder of mandatory spending should be exempt from review and reform, but the bulk of the federal dollars are in the two largest entitlements.

Waste and fraud. The significant reduction of waste and fraud is central to getting the fiscal outlook in order. Waste and fraud are not quantitatively anywhere near as important as mandatory spending, although the Government Accountability Office’s recent estimate of more than $180 billion in improper payments is nothing to sneeze at. And as a matter of politics, it seems unlikely that voters will accede to major changes in the social safety net unless they are confident their government is making every effort to use their tax dollars wisely elsewhere. A significant reduction of waste and fraud is the key to the debt reform kingdom.

Tax reform. Placing a renewed focus on saving, investment, innovation, and business creation can help to address the poor growth record in the 21^st century. The basic lesson of tax reform is to have as broad a base as possible and rates as low as possible. But achieving stronger pro-growth policies in the next round of reform requires learning two larger lessons. First, political popularity and good tax policy are not the same thing. Not taxing a portion of tips distorts pay packages, introduces unfairness and complexity, and does not deliver a pro-growth tax code. Second, corporate taxation and business taxation aren’t the same thing—and the latter is tightly related to individual income taxation.

Most business income comes from pass-through entities, in which each owner’s income share is “passed through” to be reported and taxed on his individual income-tax return. These businesses – including sole proprietorships, partnerships, Subchapter S corporations and limited-liability corporations – employ more than half of the country’s private-sector workers. They aren’t subject to corporate taxes.

The Tax Cuts and Jobs Act created Section 199A – often called the 20 Percent Small Business Tax Deduction – which allows pass-through owners to deduct 20 percent of their business’ income. It was renewed in 2025 but remains a complex and distortionary feature of the tax code that merits reform.

Regulatory reform. Regulations are a substitute for taxation and spending as a means to accomplish policy goals. Yet regulations impose costs on the economy just as taxes do. For this reason, a pro-growth strategy will control the growth of regulatory costs. In two terms as president, President Trump’s regulatory budgets have delivered a much more efficient regulatory state. Congress should adopt a permanent, statutory version of this regime.

Thank you, and I look forward to your questions.