Causes of Fiscal Deterioration Since 2001

This is boring stuff I know, but so critically important.

The fiscal mess we are in was created by the people you elect, irresponsible, pandering people in both parties, people who mislead and lie to you. People who promise this and that and ignore paying for those promises.

The truth is we need to pay the bill, that means everyone, not just the rich or those earning over $400,000 a year, but every American.

From Riches to Rags:

Causes of Fiscal Deterioration Since 2001

January 10, 2024

Read the analysis.

In 2001, the U.S. federal government ran a $128 billion budget surplus and was on course to pay off the national debt by 2009. Since then, the government has borrowed an additional $23 trillion, bringing the national debt held by the public to a near-record 98 percent of GDP and transforming that surplus into a $1.7 trillion deficit.   

Some have claimed this fiscal deterioration was entirely caused by tax cuts or was completely due to spendingo growth. In reality, both spending increases and revenue reductions can explain the growth in deficits and debt.

The growth in deficits and debt can be explained both by the automatic growth in mandatory spending and by the enactment of tax cuts and spending increases. Absent any of these phenomena, debt would be on a far more sustainable path.  

In this analysis, we assess the causes of this fiscal deterioration in two different ways: by estimating the impact of significant policy changes since 2001 and by comparing spending and revenue levels as a share of GDP in 2001 to those in 2023. 

Looking at the policy changes enacted since the beginning of 2001, we find:  

• Debt is 37 percent of GDP higher due to major tax cuts, 33 percent higher due to major spending increases, and 28 percent higher due to recession responses.
• Most debt – 77 percent of GDP – can be attributed to bipartisan legislation.
• Absent these tax cuts and spending increases, the debt would be fully paid off.

Comparing spending and revenue as a share of the economy over time, we find:

• Rising spending relative to GDP explains about two-thirds of the growth in annual budget deficits since 2001, while declining revenue explains one-third.
• Had revenue remained stable as a share of the economy, the debt would be half its size; had primary spending been stable, it would be nearly paid off. 

Under any of these counterfactuals, the deficit would currently be much smaller, and in some scenarios the budget would have been balanced or in surplus. 

Showing how things have changed does not necessarily explain the cause of debt – which is the disconnect between spending and revenue – nor does it always offer easy solutions. And notably, our analysis does not account for all causes of rising debt. Still, knowing how we got here can be useful in helping determine where to go next. Any realistic plan to fix the debt will require addressing both revenue and spending.

How Has Legislation Affected the National Debt? 

In 2001, the Congressional Budget Office (CBO) projected that the national debt would effectively be paid off in full by the end of Fiscal Year (FY) 2009. Instead, federal debt held by the public grew from 32 percent of Gross Domestic Product (GDP) at the end of FY 2001 to 98 percent of GDP at the end of FY 2023.

Reviewing major deficit-increasing legislation and executive actions over the past 22 years, we find that major tax cuts are responsible for 37 percentage points of debt-to-GDP, net discretionary spending increases and major Medicare expansions are responsible for 33 percentage points, and response measures to the Great Recession and the COVID-19 pandemic and recession – before accounting for economic feedback – explain 28 percentage points.  

Absent any two of these sets of policies, the debt-to-GDP ratio would be near the FY 2001 level. Absent these tax cuts, spending increases, and recession responses, debt would be fully paid off. 

Our analysis focuses on five pieces of tax legislation, including the 2001 and 2003 tax cuts, their extensions and modifications in 2010 and 2013, and the 2017 Tax Cuts and Jobs Act. These bills have cost nearly $8.4 trillion through 2023, of which $6.5 trillion was at least somewhat bipartisan (though skewed Republican) and $1.8 trillion was passed overwhelmingly by Republicans.  

In terms of discretionary spending, we estimate there were about $5.9 trillion of net spending increases – nearly all bipartisan – including normal appropriations increases as well as one-time spending for wars, natural disasters, emergencies, and other initiatives. Spending increases were split roughly evenly between defense and nondefense. Our estimates are generated relative to a baseline that assumes spending growth with inflation over a decade and with GDP over the long term (see Appendix I) as in many CBO Long-Term Budget Outlooks. Total real (above-inflation) increases in discretionary spending have cost $7.6 trillion, including roughly $2 trillion in funding related to the wars in Iraq and Afghanistan, and boosted debt by 35 percent of GDP. 

Our Medicare estimates cover the establishment of Medicare Part D and the net cost of actions to modify or replace Medicare’s Sustainable Growth Rate. These cost roughly $1.1 trillion, of which $900 billion was bipartisan and $200 billion came from Democratic executive actions.

Finally, we tallied the legislative and executive actions in response to the 2007-2009 Great Recession and the COVID-19 pandemic and recession. We estimate these changes have cost $6.8 trillion through 2023, with nearly $4.8 trillion enacted on a bipartisan basis, nearly $2 trillion overwhelmingly from Democrats, and less than $100 billion from Republican executive actions. 

Of the policies we reviewed, 77 percentage points of debt-to-GDP can be explained by legislation with some meaningful level of bipartisan support. Highly partisan Democratic actions explain 12 percentage points, and highly partisan Republican actions explain 8 percentage points. Many bipartisan actions extended policies that were originally more partisan in nature.

Notably, our analysis includes most of the deficit-increasing actions over the past 22 years but not all of them. Among the more significant actions not included are numerous one-time Alternative Minimum Tax (AMT) patches and tax extenders, expansions to veterans’ benefits, and expansions and modifications of the federal direct student loan program. We do not directly account for most fully offset or deficit-reducing legislation, though most deficit reduction has been on the discretionary side of the budget and is thus netted from our estimates.

How Have Spending and Revenue Changed Since 2001?

Although measuring the impact of legislation can help to explain why the debt is higher than it otherwise would have been, it is only one way to understand the fiscal deterioration over the past 22 years. In particular, the prior analysis does not account for the effects of the built-in spending growth in certain parts of the budget, while it takes for granted the built-in growth in revenue.   

An alternative method is to study how revenue and spending as a share of GDP have changed since we were last running budget surpluses, and how those changes have impacted the budget. Rather than estimating the effects of policy changes compared to a counterfactual, this type of analysis focuses on fiscal outcomes and how they have changed over time. 

Between 2001 and 2023, annual deficits expanded by 7.5 percent of GDP – from a 1.2 percent of GDP surplus to a 6.3 percent of GDP deficit. Two-thirds of this deficit growth can be explained by rising spending as a share of the economy, while one-third of the deficit growth is from declining revenue as a share of GDP. See Appendix III for more detail. 

Most of the 5.0 percent of GDP growth in spending comes from the growth in mandatory spending programs. Spending on health care programs has increased by a combined 2.5 percent of GDP, Social Security spending has grown by 0.9 percent of GDP, and other mandatory spending by 0.8 percent of GDP. While some of this growth was the result of legislation – including the establishment of Medicare Part D and the (fully offset) Affordable Care Act – most was the result of automatic spending growth based on built-in cost and eligibility growth.

On the revenue side of the equation, more than half of the 2.5 percent of GDP decline is the result of falling income taxes and the rest a decline in payroll and other tax receipts. More than all of this decline can be attributed to enacted tax cuts – partially offset by some tax increases and real bracket creep – though economic differences and capital gains realizations also play a role. 

Absent the decline in revenue since 2001, the national debt would only be half as large as it is today. Absent the increase in primary spending, the debt would be nearly paid off. 

Had policymakers held revenue constant at 18.9 percent of GDP while spending at actual levels, we estimate debt would have been about 50 percent of GDP at the end of FY 2023 instead of 98 percent. Had they held primary spending constant at 15.7 percent of GDP while raising revenue at actual levels, debt would have been 6 percent of GDP and falling by the end of FY 2023.

Finally, had revenue and primary spending both remained at 2001 levels, the national debt would have been paid off by 2011 and the government would have substantial wealth today. 

Importantly, these scenarios are necessarily illustrative. Revenue was unusually high in FY 2001, given tax rates at the time, due to economic and stock market performance. Revenue and spending also fluctuate regularly based on changes in the economy, the need to respond to crises and challenges, and other factors. It would not have been achievable nor desirable to keep spending and revenue flat through a major terrorist attack, two wars, two recessions, many natural disasters, and a pandemic. Even achieving these results on average, yielding similar fiscal outcomes, would require substantially higher taxes and less benefits and spending than what Americans of all incomes have historically experienced. Nevertheless, these illustrations help to show the effect of rising spending and declining revenue on the nation’s fiscal position. 

Could We Have Had a Balanced Budget?

The budget deficit was $1.7 trillion in FY 2023. Had policymakers not enacted a series of tax cuts, boosted base and supplemental discretionary spending, or allowed built-in spending growth to continue, the budget deficit would be much closer to balance today, if not in surplus.

We estimate that if policymakers had held revenue constant at 18.9 percent of GDP as it was in FY 2001, the deficit would be nearly 60 percent smaller at about $720 billion in FY 2023. Had policymakers instead held primary spending constant at the FY 2001 level of 15.7 percent of GDP, the government would have run a roughly $150 billion budget surplus in FY 2023.  

Had policymakers not enacted the five major pieces of tax cut legislation between 2001 and 2017, the budget deficit would have been $650 billion in FY 2023. Meanwhile, had they not increased discretionary spending and expanded Medicare, it would have been $1.1 trillion. And had they not enacted either the tax cuts or the spending increases, the deficit would be only $100 billion.

Other scenarios could have led to even larger surpluses. For example, had policymakers not enacted tax cuts, spending increases, or legislation in response to the Great Recession and COVID-19 pandemic – assuming no dynamic effects – the government would have run a $260 billion surplus in 2023. Had they held primary spending and revenue to FY 2001 levels and earned interest on accumulated wealth, the government would have run a $1.1 trillion surplus in 2023.  

These estimates do not account for most dynamic effects of various policies on the economy. 

Conclusion  

Since 2001, the United States turned a modest budget surplus into a $1.7 trillion budget deficit and has tripled the debt-to-GDP ratio from 32 percent to 98 percent. While the nation was on course to pay off its debt back in 2001, it now faces high and rising debt with no end in sight.  

These high and rising deficits and debt are caused by the disconnect between spending and revenue. Whether spending is “too high” or revenue is “too low” is a question of values and priorities that cannot be answered objectively. However, it is useful to understand whether changes in spending or revenue can explain our nation’s fiscal deterioration – and the clear answer is that both can. Increases in spending and reductions in revenue are both to blame for the rapid rise in deficits and debt that has occurred since 2001. 

Unfortunately, understanding the drivers of the debt does not always lend itself to obvious solutions. Many of the legislative causes of debt have already ended or are soon scheduled to – for example, spending on Iraq and Afghanistan, COVID-19 relief, and parts of the 2017 tax law. And simply restoring policies to either 2001 levels or those consistent with 2001 law would have significant economic, distributional, welfare, and political consequences. 

Yet just as spending increases and revenue reductions can help explain our current fiscal situation, slowing spending growth and enhancing revenue collection can help improve our fiscal outlook.

The CRFB Fiscal Blueprint suggests a path forward that incorporates both spending and revenue changes. Congress should also establish a bipartisan fiscal commission that considers changes on both sides of the budget.