The Congressional Budget Office confirmed on Monday what many Americans and all politicians already know: the United States is in a deeply precarious fiscal position.
In just one short year, our budget deficit has ballooned by over $1 trillion; by 2028 the accumulated debt is expected to roughly match the size of the economy. If our oversized public debt explodes into a full-blown crisis, no one can say we weren't warned.
The debt overhang will have real impacts on Americans—imposing higher borrowing costs, changing retirement as we know it and slowing the rate of growth. The plausible options for fixing the situation are diminishing, but fixing it should be a first-order policy priority.
The CBO's worrisome ten-year outlook underscores the severity of the situation and reveals three areas of major concern.
- Budget cuts: One plausible solution to the fiscal imbalance-budget cuts-is already dead. The Budget Control Act of 2011 put "non-military discretionary spending"—a category that basically encompasses everything but large social insurance programs and defense— on a path to the lowest levels we have ever seen. Further cuts are off-the-table as a deficit-reduction strategy, as substantially lower levels would effectively mean the death of public investment.
- Health-care spending: Long-term debt is closely tied to economy-wide health care costs, and by eliminating the individual mandate, Congress just undercut one of the most-effective strategies for holding down health spending—incentives to encourage more families to purchase insurance. In a 2014 paper I wrote with colleagues Alan Auerbach and William Gale, we projected that public debt in 2040 would grow to about 120 percent of GDP if health costs are kept in check and about 190 percent of GDP if they aren't. In other words, a fiscal crisis is all but guaranteed if we can't constrain cost growth in health care.
- Tax changes: The combination of cumulative cuts to the IRS budget and an economy increasingly reliant on independent contractors could foster a culture of evasion. IRS audit rates have fallen by about one-third over the past five years. At the same time, many expect workers to increasingly shift their income towards pass-through entities like partnerships and sole proprietorships, which historically have much higher evasion rates than employer-based pay. The combination could further depress tax receipts.
These concerns all exacerbate the fundamental problem with our fiscal dilemma: a structural mismatch between revenues and outlays. When the government consistently runs deficits in excess of 4 percent of GDP during the height of an economic expansion, policymakers are pretty much begging for a fiscal crisis. This imbalance will eventually impact millions.
Here's who will feel the most pain:
First up is any American hoping to borrow. Homebuyers seeking a mortgage. Students borrowing for tuition. Entrepreneurs looking for a small business loan. The 10-year Treasury bill rate has already risen by about 40 basis points this year alone, and earlier this week JPMorgan CEO Jamie Dimon said it could rise by another 120 basis points by year's end.
The second group facing a bleak future? Retirees. With the ink barely dry on a budget-busting $1.5 trillion tax cut, a group of conservative economists recently proposed entitlement cuts to right the fiscal ship—calls from policymakers are soon to follow.
But there is simply no way to substantially cut these programs without forcing American seniors to work longer and pay more out-of-pocket for health care. If the cost to last year's corporate tax cut was losing an extra year or two of retirement, Americans should have been presented with an honest choice when the tax bill was passed back in December.
The third casualty affects everyone: future growth. Whether by financial crisis, higher interest rates, or severed spending on public investment, these massive deficits will be a drag on economic growth one way or another. And when the next recession comes (and it will), we may not be able to stimulate our way out of it. America found its way out of the Great Recession in large part through tax rebates and infrastructure spending—these options may not be available if excessive debt is the cause of the slowdown in the first place.
There are plausible exit strategies. Cutting tax expenditures like stepped-up basis or untargeted incentives for retirement saving have long stood as a possible savior to our budget woes. Budget commissions of all stripes have recommended cutting these expenditures as a way to lower the debt, and eventually Congress just might listen.
A second option is one that almost no one talks about: collecting more of the taxes that are owed by taxpayers. Tax evasion costs the Treasury around $400 billion a year, which ultimately amounts to a massive tax on honest taxpayers. Our budget troubles would be solved in a day if tax evaders simply paid their fair share.
In the end, it's impossible to know how this fiscal imbalance will play out. But at least two things are clear One, the problem got a whole lot worse over the past year. And two, we are not finding our way out of this mess any time soon.
Commentary by Benjamin Harris, a visiting associate professor at the Kellogg School of Management at Northwestern University and was formerly the chief economist to Vice President Biden.
Follow CNBC's Opinion section on Twitter @CNBCopinion.