Delaying Fiscal Reform is Costly, Annual Treasury Report Warns
In the recent Financial Report of the United States Government for fiscal year 2025, the Department of the Treasury projects that debt as a percentage of gross domestic product (GDP) will grow to more than five times the size of the U.S. economy in the next 75 years. The report provides a comprehensive view of the federal government's finances and illuminates the nation’s unsustainable long-term fiscal outlook.
The two main findings related to the nation’s fiscal trajectory are:
- The United States’ debt-to-GDP ratio is projected to rise from 100 percent in 2025 to 576 percent in 2100.
- Delaying fiscal policy reform is costly – requiring larger adjustments to government spending and revenues than if reform is enacted in 2026.
Why Is Our Current Fiscal Path Unsustainable?
The U.S. Department of the Treasury defines sustainable fiscal policy as “one where the ratio of debt held by the public to GDP (the debt-to-GDP ratio) is stable or declining over the long term.” The fiscal path of the U.S. government is currently unsustainable because the ratio of debt held by the public as a percentage of GDP is expected to rise rapidly. The steady rise by 2100 will more than quintuple the debt-to-GDP ratio relative to its current level, which is already near its all-time high.
The Treasury’s report states that rising debt as a percentage of GDP is concerning because it indicates that the economy will have less capacity to support government programs. GDP is the value of final goods and services the country produces in a year, and when the debt-to-GDP ratio is larger, more of the economy goes towards servicing the debt. Therefore, less margin remains to finance programs that encourage economic growth or provide a social safety net.
How Big Is the Fiscal Gap?
The mismatch between the government spending and its revenues over a specified period is known as the fiscal gap. The fiscal gap can also be defined as how much non-interest spending and revenues must change on average over the 75-year period to keep the debt-to-GDP ratio at its current level. The Treasury’s report finds that the structural mismatch between government spending and revenues will grow over the period ending in 2100.
In dollar terms, that fiscal gap over the next 75 years amounts to $96 trillion on a present-value basis (the worth of total obligations net of receipts over the next 75 years, discounted at an interest rate to bring future cash flows back to present value). Social Security and Medicare, the two largest categories of the budget, account for $88.4 trillion of that fiscal gap, as both programs have statutory obligations to fulfill in perpetuity but do not bring in enough revenues to cover expenses.
Moreover, the longer we wait to act, the more difficult it will be to close the fiscal gap. If the United States begins fiscal reform in 2026, it will require some combination of spending cuts and increases in revenues to reach primary surpluses (i.e., excluding net interest costs) that average 4.7 percent of GDP annually to achieve fiscal sustainability. Waiting 20 years to address the increasing debt as a percentage of GDP would require adjustments of 6.9 percent of GDP on average annually, or roughly $700 billion more in changes each year than if changes started now. The Financial Report of the United States Government for fiscal year 2025 outlines the necessary adjustments to make the fiscal situation sustainable (also known as eliminating the fiscal gap), depending on the time for initiating reform:
The sooner reform occurs to eliminate the fiscal gap, the easier the task will be for policymakers and the lighter the burden will be on future generations. Delaying reform simply allows even more debt to be accumulated and will require higher proportions of the budget allocated to interest payments. Such a trajectory could reduce private investment, economic opportunities, national security, and the safety net while also increasing the risk of a financial crisis. Specifically, delaying reform places an additional burden on future generations — requiring higher future taxes to be paid and likely reducing spending on future benefits.
Conclusion
The Financial Report of the United States Government for fiscal year 2025 clearly demonstrates the nation’s unsustainable fiscal outlook in the long run and the cost of delaying reform. Acting now to address the mismatch between spending and revenues — and control the growth of debt as a percentage of GDP — is advantageous to minimize the cost of necessary adjustments and create a positive fiscal future for the United States.
Further Reading
The U.S. Dollar Is the World’s Reserve Currency. Why Does That Matter?
The country’s unsustainable fiscal outlook threatens to diminish the dollar’s standing, which would have damaging fiscal and economic consequences for the United States.
Debt vs. Deficits: What’s the Difference?
The words debt and deficit come up frequently in debates about policy decisions. The two concepts are similar, but are often confused.
5 Ways Rising National Debt Makes America Less Affordable
The rising debt contributes to higher inflation and interest rates, which can have significant negative consequences for American families and businesses.