The following editorial was written by the editors of Bloomberg Opinion:
Since the start of the new year, the bond market has been urging Congress to come to terms with America’s spiraling budget problems. Soon it might be demanding immediate action.
Long-term yields have hovered around 5 percent. If they stay there, the government’s inflation-adjusted cost of borrowing will likely exceed the economy’s rate of growth — meaning that bigger spending cuts or tax increases will be needed to rein it in. This is what “unsustainable” fiscal policy looks like.
Lawmakers haven’t even started talking about this problem, much less grappling with it realistically.
To illustrate, the government’s single biggest spending program, at about $1.5 trillion a year, is Social Security. Gradually raising the normal retirement age to 70 from 67 — a controversial reform, too much for many politicians — would reduce the program’s 10-year outlays by roughly $100 billion.
What about taxes? The Congressional Budget Office estimates that a surtax of 2 percentage points on incomes above $100,000 ($200,000 for joint filers) would raise about $1 trillion over 10 years. Limiting personal-tax deductions could plausibly raise some $2 trillion; eliminating them altogether would raise about $3.5 trillion.
The point is straightforward: To get on top of the country’s fiscal problem, everything must be on the table. To keep spending cuts feasibly modest, program by program, savings must be found in many different areas: Social Security, Medicare, Medicaid, defense and other discretionary categories.
Revenue must likewise be examined from every angle: Limit personal-tax deductions, reform the corporate tax (preferably by raising the rate while shielding new investment), gradually trim tax subsidies for borrowing and for employment-based health insurance, raise the earnings ceiling for the payroll tax, start taxing carbon emissions, eliminate stepped-up basis at death for capital gains tax, and more.
The wider the net, the less disruptive each of these changes will need to be. Indeed, many of these reforms would be valuable in their own right: If well designed, they could support growth even as they help get public borrowing under control.
Bear in mind, Washington’s next initiative seems likely to be in the opposite direction: Extending the provisions of the 2017 Tax Cuts and Jobs Act could add another $5 trillion to cumulative deficits by 2034.
Scott Bessent, President Donald Trump’s choice for Treasury secretary, said recently that extending the Tax Cuts and Jobs Act was a top priority. He needs to think again.
At a minimum, lawmakers should ensure that extensions are paid for, so the plan is revenue-neutral. Then, as a matter of urgency, they must turn their attention to stabilizing the debt. The longer the task is delayed, the harder it will get — and the bigger the risk that a financial panic will demand a far costlier reckoning.