From Riches to Rags: Causes of Fiscal Deterioration Since 2001

From Committee for a Responsible Federal Budget. Excerpt:

"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 spending 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 2023.¹ 

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) 2009.²  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, ³  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."