In today’s Wall Street Journal, “Cutting the Deficit is Easy-Just Unpopular,” the author, Grep Ip pointed out that cutting the deficit will be very difficult. Certainly, not politically easy.
In 2024, the deficit was $1.8 trillion, or 6.4% of the Gross Domestic Product (GDP). The economy grew by only 2.7%. Economists would argue that prudent financial management would require the deficit to grow no faster than the U.S. economy. Our current debt is approximately $36 trillion dollars, representing 30% of all debt in the world. By contrast, our GDP is about 15% of the world GDP. Thus, on an absolute basis and relative basis, our national debt is enormous. Even worse, the non-partisan Congressional Budget Office projects that our debt will grow to $50 trillion over the next decade.
Elon Musk believes that he can cut federal spending by $2 trillion annually. To date, his ideas mostly revolve around firing civil servants, closing or merging government agencies, and cutting regulations. Salaries for all civil servants cost around $200 billion to $250 billion annually which is about one-eighth of our deficit. More than 60% of employees work for the military or security-related agencies, the functions President-elect Trump wants to increase.
Most spending is for government checks that they send out. For example, half of the spending by the Department of Education is for loans and grants to students.
Federal spending falls into three categories. First, interest on the debt was $882 billion in 2024. Second is discretionary spending, which gets authorized by Congress each year. It is about half of the Third category, mandatory spending ($4.1 trillion). Mandatory spending would include Social Security, Medicare, Medicaid, Affordable Care Act subsidies, Food Stamps, child tax credits, welfare, veterans’ benefits, and pensions. Mandatory spending continues each year without new authorization from Congress. While the president can cut mandatory spending unilaterally, this would be highly unpopular.
An example of mandatory spending that is subject to presidential intervention are anti-obesity drugs. President Biden proposed that Medicare and Medicaid cover anti-obesity drugs. The nonpartisan Penn Wharton Budget Model put the cost at $140 billion annually. Trump can prevent this new federal spending by not implementing Biden’s rule. This would not be popular.
Clearly, there is waste involved in discretionary spending, some $2 trillion. However, we are talking $billions, not $trillions. Moreover, we need to recognize that much of the “waste” is a function of some Congress person’s pet projects.
My conclusion is the only way to meaningfully cut the deficit is to raise taxes, a very unpopular measure. No one can predict when our deficits will cause a financial panic. That said, my prediction is we will face the music within a decade.
