When Fiscal Policy Meets Mathematical Reality

By Sita Nataraj Slavov, Project Syndicate | March 11, 2025

Republicans and Democrats today both make the same mistake: they insist on letting voters to believe that they can maintain a large welfare state without imposing the requisite level of taxes on the broader public. Yet this head-in-the-sand approach to fiscal policymaking obviously cannot go on forever.

WASHINGTON, DC – The unprecedented political polarization in the United States has led many observers to lament the decline of bipartisanship. But bipartisanship is alive and well in one area: Republicans and Democrats agree that reining in the federal government’s massive budget deficits and record debt is not a high priority.

It is not surprising that fiscal discipline was neglected during the election season. But the election is over, and the new Republican-controlled government – led by President Donald Trump and majorities in both houses of Congress – offers little hope for fiscal conservatives, or for the future generations who will be harmed by unsustainable government borrowing.

The federal debt is currently around 120% of GDP, having reached its highest levels since World War II in the past five years. The Congressional Budget Office projects that if spending and revenue continue along their current paths, the debt will reach 166% of annual GDP by 2054. This growth is driven primarily by rising health-care costs and an aging population, which put pressure on Social Security and federal health-care programs.

The implications of this growing fiscal imbalance are disturbing. Rising debt levels increase the risk of a financial crisis as creditors come to fear inflation or default. Even without a financial crisis, debt imposes heavy burdens on future generations. When the government borrows money, it “crowds out” private investment in capital, which in turn reduces productivity and wage growth for workers. Moreover, interest payments on the growing debt will eventually require the government to reduce spending or raise taxes.

To be sure, the Trump administration has made noises about reducing the size of government, establishing the advisory Department of Government Efficiency (DOGE), headed by Elon Musk, to tackle the issue. Musk initially pledged to slash federal spending by “at least $2 trillion” per year. Yet even before Trump’s inauguration, he had backtracked, calling that figure a “best-case outcome.” It is not hard to see why that target slipped so quickly. In fiscal year 2024, the federal government spent $6.75 trillion, more than one-third of which – $2.3 trillion – went to fund Medicare and Social Security, popular programs that benefit middle-class Americans.

It simply is not possible to reduce federal spending substantially without touching these large entitlement programs. In past decades, fiscally conservative Republicans like Paul Ryan have taken on the challenge, proposing ways to slow the programs’ growth. Yet the most recent Republican platform – refashioned to reflect the party’s shift toward economic populism – explicitly pledges that there will be “no cuts” to these programs.

In principle, DOGE could propose gutting programs for low-income Americans (which add more than $1 trillion to the budget) – a possibility that has led to some panic on the left. But this would be a tough sell, too. Large majorities of Republican voters support either maintaining or increasing funding for Medicaid and other means-tested programs, and Trump has promised not to cut Medicaid. Thus, Republican budget-cutting efforts have instead focused on foreign aid and the federal workforce – both of which represent tiny shares of spending, relative to entitlements.

On the other side of the ledger, Republican populists are largely sticking with their party’s longstanding commitment to lowering taxes. Trump’s tax priorities include both extending the Tax Cuts and Jobs Act and implementing several targeted tax breaks – collectively projected to increase deficits by $5-11 trillion over a decade. Claims that these measures could stimulate enough economic growth to pay for themselves are wishful thinking.

The notable exception to the Republicans’ tax-cutting agenda is, of course, tariffs. Trump has even touted an “all tariff” model for the federal government, noting that customs duties were the federal government’s main source of revenue until the 1890s. But federal revenue during that era amounted to less than 3% of GDP. Major entitlement programs like Social Security and Medicare – now 9% of GDP – did not exist.

If Republicans want to reduce non-tariff taxes, and if entitlement cuts are a non-starter, could tariffs be designed to raise substantially more revenue than they did in the 1890s? The answer is an unambiguous no. Erica York of the Tax Foundation estimates that even if tariffs were set to maximize revenue, they would not bring in much more than 2% of GDP. The problem is that tariffs apply to a limited tax base: imports are already a modest share of the US economy and will shrink further as tariffs are increased.

Finally, what about the Trump administration’s claims that reducing immigration would bolster the finances of federal entitlement programs? A detailed analysis by Daniel Di Martino of the Manhattan Institute finds that while the average immigrant improves the federal government’s finances over his or her lifetime, there is considerable variation by education and age at arrival. Thus, carefully targeted measures could potentially reduce both overall immigration and the debt burden. But these still would not come close to making current fiscal policy sustainable.

The bottom line is that if Republican populists are serious about putting the federal government’s finances in order, they will need to look beyond proposals that falsely promise easy fixes – reducing “waste,” cutting foreign aid, scaling back the federal workforce, increasing tariffs, or curtailing immigration. Unfortunately, they have not yet shown any interest in doing so.

The Nub of the Matter

While Republican approaches to fiscal policy are what matter at least for the next two years, the Democrats’ record on fiscal responsibility is no better. Many Democrats support large increases in spending on social programs, while expressing a deep reluctance to raise taxes on anyone but the richest Americans.

Both parties make the same mistake: they want to maintain a large welfare state without imposing the requisite level of taxes on the broader public. Moreover, politicians in both parties are arguably just acting out the bad incentives that voters face. If you are old enough to vote, it simply is not in your immediate self-interest to tackle the large and growing debt. It is much easier to continue to enjoy the benefits of social programs and tax cuts, while passing on the costs to future generations.

Dealing with the debt, therefore, requires looking beyond immediate self-interest. Such behavior could be incentivized by adopting fiscal rules like those found in other high-income countries. Addressing the debt also requires honesty about the costs of generous social programs. A recent Peterson Foundation initiative invited think tanks from across the political spectrum to submit comprehensive plans to restore fiscal sustainability. Proposals on the “small government” side would keep tax revenue below 20% of GDP, while significantly reducing health-care and Social Security spending.

In contrast, the most progressive proposal would make federal benefit programs more generous, while also increasing taxes on the broader public, rather than on just the highest-income individuals. Revenue under this proposal would reach one-third of GDP.

These proposals highlight the difficult choice Americans face. Should we impose significantly higher taxes on the public, not just top earners, to maintain or expand federal benefit programs (in line with what European countries have done)? Or should we cut these programs to keep taxes closer to their current levels?

For future generations’ sake, policymakers and voters in both parties need to face reality and confront this tradeoff.

Sita Nataraj Slavov is Professor of Public Policy in the Schar School of Policy and Government at George Mason University and a nonresident senior fellow at the American Enterprise Institute.

Copyright Project Syndicate