What Does Fiscal Sustainability Mean?

Most people agree the federal budget is in rough shape. But what does it actually mean for the budget to be unsustainable, and what’s the best way to tell whether policy is helping or hurting?

Senior Fellow Matthew Dickerson explains why government spending is the most important policy lever for fiscal sustainability.

Some analysts focus on interest rates. The theory is that as long as the government borrows at a rate below the rate of economic growth, it can run deficits without much concern. Those factors are worth understanding, but Congress doesn’t directly control either one. And even when rates sit below growth, rising primary deficits can push interest rates up and slow growth, which reverses the equation.

Others look at the size of the debt or the annual deficit. But debt and deficits are byproducts of the budget’s underlying components: revenues and spending.

At the most basic level, spending that grows faster than the economy can’t be sustained. Investors who buy federal debt have to believe the government can raise enough revenue from the private sector to pay them a real return. Taxes can’t keep growing faster than the economy without discouraging the work, investment, capital formation, and job creation that build the tax base. Squeeze the golden goose too hard and it stops producing.

That leaves spending as the variable Congress can most directly control. Congress sets tax rates, but how much revenue comes in depends on what the private economy produces. By contrast, the government can’t legally spend a dollar Congress hasn’t appropriated. About 60% of the budget runs on autopilot through non-interest programs funded outside annual appropriations. Those programs are still within Congress’s power, and its responsibility, to adjust when they’re on the wrong course.

The budget is on an unsustainable path because spending is growing faster than the economy, and that path raises the risk of a fiscal crisis marked by higher interest rates, inflation, or financial instability.

In this video:

• What fiscal sustainability means
• Why the interest rate vs. growth comparison has limits as a guide
• Why debt and deficits are symptoms, not causes
• How taxes that outpace the economy undermine growth
• Why spending is the lever Congress controls most directly

More resources for Congress and congressional staff: https://fiscallab.org