Debt Default - US Reaction

James Pethokoukis

Politics and policy from inside Washington

How would U.S. react to a debt crisis?

Jul 20, 2011 13:20 EDT

If the U.S. doesn’t get a handle on federal debt, there will be a financial and economic crisis. By 2035, debt as a share of GDP could be 250 percent, though a panic would surely happen long before that point was reached. But if a crisis came, how would Washington react? What drastic measures would be taken? I think there would be a huge push for a massive tax increase, probably via a value-added tax. Here is some of what the Comeback America Initiative sees happening:

Social Security
• The higher retirement eligibility ages for Social Security would be increased to 70 for normal retirement and 65 for early retirement, and fully implemented by 2030 and 2020, respectively.
Most of the proposed reforms under the Preemptive (Prudent) Framework would be retained with the following significant differences:
• Repeal the Affordable Care Act of 2010.
• Repeal the Medicare Modernization Act of 2003.

Defense:

Most of the illustrative reforms under the Preemptive (Prudent) Framework would be retained with the following significant differences:

• Accelerate the planned draw down of U.S. troops from Southwest Asia from the end of 2014 to the end of 2012.
• Accelerate the reduction of U.S. overseas military and civilian presence.
Taxes and Revenues:
• Impose temporary deficit reduction revenue increases in fiscal 2013-2014 to accelerate deficit reduction and debt/GDP stabilization efforts.
• Phase-in the special income and payroll tax exclusion on employer provided and paid health care by 2018.
• Take any other actions needed to comply with annual revenue targets.

And the result:

The result is a balancing of the total budget by 2015, and reduction of debt/GDP to about 51 percent of GDP in 2021 and declining rapidly, versus about 76 percent of GDP and increasing rapidly under CBO’s current law baseline, and to about 28 percent and declining in 2035 versus about 91 percent and rising under the baseline.  … Overall spending under the framework would be reduced to 20.1 percent of GDP in 2021, from 23.9 percent under the current law baseline, and to 21.8 percent of GDP and leveling in 2035 from 28.3 percent and rising under the baseline. Nominal public debt would be less in 2023 than 2015 and essentially stable.The Reactive (Crisis Management) Framework also involves having to impose a temporary deficit reduction revenue increases to accelerate deficit reduction and debt/GDP stabilization, while maintaining an overall cap on federal revenues at 21.5 percent of GDP