July 10, 2026

We have written about the war and oil prices, inflation and the Fed for weeks. Time to switch gears and take a look at the budget deficit for the next decade. Both the budget deficit and Treasury debt outstanding as a percent of GDP are already at record high levels and will continue to climb for the next decade. Interest on the public debt as a percent of GDP will surge. This is not a sustainable solution. But Congress continues to ignore the issue. It will not go away. At the same time the Social Security Trust Fund will have evaporated by the fourth quarter of 2032. Six years from now. Once that happens the monthly benefits checks to all 62 million Social Security recipients will be cut by 22%. This issue will also not go away and, once again, no one in Congress seems concerned. The clock is ticking. Every year of inaction means that the ultimate adjustment required to solve the problems will be increasingly onerous. Nobody cares.

The budget deficit for fiscal 2026 should be $1.8 trillion. The last budget surplus was in 2001. That was 25 years ago. The budget exploded during the 2008-09 recession and surged again in the COVID related recession in 2020. Within a decade it is projected to exceed $3.0 trillion and that will occur only if there is no recession between now and then. That seems unlikely. During a recession tax revenues shrink and government spending explodes. We saw what happened in 2008-09 and 2020. We should assume that the $3.0 trillion deficit projected for 2036 will be a best case scenario — unless Congress does something.

Perhaps the best way to evaluate any budget deficit is as a percent of GDP. If the economy can grow quickly enough perhaps these seemingly outsize deficits are affordable. Unfortunately, viewed in that way the deficits are still a problem. Over the 60 years between 1960 and 2020 the budget deficit as a percent of GDP averaged about 3.0%. Economists view a deficit of that magnitude as “sustainable”. But for the current fiscal year the deficit is likely to be 5.6% of GDP. By 2036 it is expected to climb to 6.7% of GDP. That is not even close to what economists view a sustainable.

A budget deficit by definition is the shortfall between tax revenues and government spending. Which of the two is more responsible for the deficit explosion? Answer: government spending.

Historically, tax revenues average about 17.5% of GDP. This year tax receipts should be about 17.2% and they are projected to climb to 17.8% by 2026. The budget deficits are not being caused by a shortage of tax revenue. Higher taxes are not the solution.

The problem is on the government spending side. Historically, spending has averaged 20.5% of GDP. This year it will be 22.7% of GDP and likely to climb to 24.4% by 2026.

The biggest problem on the spending side is that two-thirds of every dollar spent is an “entitlement” which is a monthly income support payment. There are a wide variety of such expenditures but the largest and most widely recognized are Social Security, Medicare, and Medicaid, followed by welfare spending, child support payments, and veteran’s benefits. Politicians love entitlements which increase income for some voters in their district. For that reason entitlements almost never go down. As a result, they have climbed from 25% of the government spending pie in the mid-1950’s to about 60% today and are unlikely to decline much any time soon. For a politician a vote to cut Social Security payments will almost certainly be the train wreck that ends their career.

An additional problem on the spending side is interest on the public deficit. At $970 billion or it is now the third largest expenditure category after Social Security which costs $1.6 trillion and Medicare at $1.2 trillion. Interest on the debt exceeds defense spending which is $898 billion. As a percent of GDP it is the highest since the government began keeping records in 1940, and it is going to keep climbing in the years ahead as the debt level grows and interest rates remain steady.

Each year that the government runs a budget deficit it must issue an equal amount of debt to pay its bills. As a result of the surge in deficits during the two most recent recessions today that debt/GDP ratio stands at 100% and is expected to climb to 120% ten years from now. But as recently as 2008 (prior to the first recession) this ratio stood at a very sustainable 36%. As a country we have gone on a borrowing binge.

The previous record debt/GDP ratio was106% at the end of World War II. Once the war ended and wartime spending fell this ratio quickly dropped back to a sustainable level which economists suggest is about 50%. That will not happen this time. Today the debt/GDP ratio is double that and still climbing. One would like to think that we got something in exchange for that additional debt – improved infrastructure, improvements to our health care system, better education, a huge stockpile of critical military weapons. But we got none of that. Instead, we have increased the size of government benefits to all sorts of individuals to supplement their monthly income. Some need that help. Many are relatively well off and do not need the help. And others simply abuse the system. Is that how we are supposed to be spending our taxpayer dollars?

It is true that the federal government can always get whatever money it needs by issuing more debt. But at what price? If investors lose confidence in the government’s willingness or ability to responsibly manage its debt, interest rates will climb significantly. If that happens will the private sector be able to get the funding it needs when the government’s appetite is so large and interest rates are so high?

One would like to think that somebody in a position of leadership today would be sounding the alarm. But those voices are few and far between and their pleas are being drowned out by louder voices elsewhere. The solutions to excessive spending are easy to find. The political will to do so is what’s missing.

A related problem is that the Social Security Trust Fund will be depleted in 2032. Looking ahead more and more baby boomers will retire, the birth rate should continue to slow, there is likely to be a further reduction in net immigration, and the One Big Beautiful Bill Act made permanent the lower ordinary income tax rate originally passed in 2017. As a result of these changes the trust fund will receive lower levels of revenue in the future and it will be depleted in 2032. At that point Social Security can only pay out as much in benefits as it has coming in revenues. That means that in 2022 Social Security benefits will need to be cut by 22%. As a result, there will be 62 million unhappy Social Security recipients who are likely to blame whichever party is in office at that moment.

Our elected officials seem to think that debt no longer matters. They want to shove the Social Security problem under the rug. But these problems will not disappear and the longer we wait to address them the magnitude of the adjustment needed to fix the problems will get increasingly onerous. Nobody cares.

Stephen Slifer
Number Nomics
Charleston, S.C.