Thank you for the opportunity to submit a written statement. I regret not being there in person due to previous commitments.
I’ve been involved with the federal budget since 1984 when I joined Senator Domenici’s Senate Budget Committee staff as a CPA and economist. My engagement with the budget continued across my 10 years in federal employment, 24 years as a Wall Street economist and as President of the World Bank Group.
During those decades federal spending, revenues, debt, fraud and waste have all skyrocketed — growing faster than the economy, crowding out the private sector and causing income inequality. One glaring aspect of that inequality is record income and wealth in the Washington area.
Growth of government and debt are accelerating. I’ve testified several times about the consequences and solutions, written dozens of articles on this in the Wall Street Journal, dedicated my Forbes column to an upheaval in government bloat, served on Chairman Bill Archer’s Commission on dynamic scoring, and recently worked with Bill Beach to found the Fiscal Lab on Capitol Hill.
I have several grim observations.
The problem of government bloat is getting worse.
The Constitution gives Congress unlimited power of the purse. It doesn’t limit the size of government or national debt nor provide checks and balances to protect people from overly large government.
Political backbone can’t fix this problem or limit spending. The current system strongly favors more spending, not less. We need new checks and balances on the size of government.
Unfortunately, changes to date in the budget process have gone in the wrong direction, enlarging the government in four major ways.
First, the so-called debt limit law enacted in 1917 erased the requirement that each spending bill include a source of funding. Rather than a restraint, it now serves as an opportunity for more spending, see my December 22, 2024 Wall Street Journal article Trump and the Fake Debt Limit.
Second, entitlements removed accountability. Much of the ongoing enlargement of government is never approved by Congress or the President, it’s done on auto pilot.
Third, financial innovations in the government bond market make it easy to borrow $39 trillion, and will allow that to double by drawing on savers worldwide. People have talked hopefully about hitting a fiscal cliff for 40 years yet government spending grows inexorably and projections show unlimited expansion.
Fourth, in 2008 the Federal Reserve assumed the power to buy unlimited amounts of government bonds using bank loans, heavily foreign-sourced. This Fed policy, which has embedded itself, entwines fiscal and monetary policy and is causing hundreds of billions of dollars in losses as bond yields move higher and the value of the dollar erodes.
In combination these four developments make federal spending and debt easy and Congress unaccountable. It can’t be stopped without new checks and balances.
Rewrite the Debt Limit So It Works
The debt limit could be used as a legislative vehicle. The debt limit will be a must-pass bill in 2027. The current debt limit’s only concrete enforcement mechanism is a dangerous game of chicken over whether to default on Treasury debt, a step that would be monumentally damaging. As written, it was not intended to limit spending and hasn’t — for over 100 years.
The solution is to use the next debt limit debate to replace the debt limit with something that leans against bigger government. Serious efforts to strengthen the debt limit would win instant acclaim from the public and financial markets.
The new debt limit law should consider two procedural principles. First, rather than default, there should be incremental consequences painful to Washington when it violates the debt limit. Second, the limit on spending or debt should be a percentage of gross domestic product rather than a dollar amount and should focus on cumulative debt, not annual deficits. Future increases to the limit should be rare or nonexistent so Congress only has to vote once.
The nation should brainstorm on ways to stop government bloat. Here are several ideas:
- Expanded rescission and impoundment authority allowing the president and Congress to reduce spending rationally.
- To hold future presidents accountable alongside Congress, there could be limits on executive-branch spending and pay whenever the government is above the debt limit.
- The executive branch could be required to propose spending cuts when spending or debt is over the limit.
- No new construction of monuments or government buildings in the Washington area while debt is above the agreed limit.
- The new debt limit could also include incentives for government officials, such as bonuses for spending cuts and below-target debt levels.
- The new law should make clear that there will be no defaults ever. No one expects Washington to restrain itself, so the financial market reaction would be an instantaneous reduction in interest on the national debt, providing a down payment on the deficit.
In sum, political leaders need new tools to shoulder the burden and sort the spending options, and they need penalties that hold each other accountable to voters. The more public the penalties on Washington, the better to help uproot the entrenched tax-and-spend culture.
Thank you,
David Malpass
David R. Malpass served as 13th President of the World Bank Group from April 2019 through June 2023.
