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Eliminating the federal government’s roughly $2 trillion budget deficit would help ease the affordability challenges facing American households, a new analysis suggests.
The nonpartisan Committee for a Responsible Federal Budget (CRFB) published a report on Wednesday detailing how reducing the federal budget deficit in the near and long term can improve affordability issues for Americans through fiscal policy changes involving tax and spending policies.
The CRFB found that deficit reduction can provide a boost to affordability by reducing inflation, lowering interest rates, reducing cost pressures caused by government policies, promoting private investment and preventing future affordability crises that could be caused by the insolvency of Social Security and Medicare.
“Fiscal policy alone cannot solve all affordability challenges,” CRFB said, adding that monetary policy, regulation, plus policies related to housing, trade, foreign, labor and education are also important factors, including at the state and local levels. “But responsible fiscal policy can play an important role.”
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The federal government is running a $2 trillion budget deficit this fiscal year. (J. David Ake/Getty Images)
“On the contrary, expansionary fiscal policies – trying to solve affordability problems with subsidies, tax cuts, or spending measures financed by borrowed funds – may exacerbate affordability challenges over time by increasing inflation, interest rates, and the cost of what is subsidized,” the group wrote.
The CRFB said that fiscal policies aimed at reducing the deficit, such as higher taxes or limited federal spending and transfers from the government to households, reduce excessive consumer spending and inflationary pressures that households face.
Reducing inflation, which has exceeded the Federal Reserve’s 2% target for five and a half years and is now about 3.4% annually, could also give the central bank room to reduce short-term interest rates.
“Deficit reduction reduces interest rates through two channels. First, a lower deficit reduces inflationary pressure and thus makes it easier for the Federal Reserve to reduce short-term interest rates (or reduce the need for the Fed to increase interest rates). Second, lower stocks reduce the interest rate that the Treasury must offer for long-term debt in order to attract buyers,” said the report.
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Reducing the federal deficit can reduce inflationary pressures that affect household budgets. (Spencer Platt/Getty Images)
The CRFB notes that the Congressional Budget Office (CBO) estimates that every 1 percentage point reduction in the debt-to-GDP ratio lowers interest rates by about 2 basis points. That means interest rates are now about 1.5 percentage points higher than if the U.S. debt-to-GDP ratio were still at 2001 levels and hadn’t tripled in the past 25 years.
Health care costs are a key area where government reforms in programs like Medicare and Medicaid can reduce costs for the government and consumers. For example, the CRFB notes that policies to lower drug prices, reduce overpayments, and reform provider payments can lower premiums and insurance costs for Medicare enrollees.
A lower federal deficit could also boost private investment, as the CBO estimates that every dollar of federal debt “crowds out” about 33 cents of private investment — meaning companies are investing less in areas that could boost worker productivity and wages.
The CRFB noted CBO’s 2025 findings that stabilizing debt as a share of GDP would increase per capita income growth by a tenth over the next three decades compared to the baseline and by more than 44% compared to the higher government debt scenario.
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Reducing the budget deficit reduces the risk of a fiscal crisis and gives the government more flexibility during recessions, the CRFB said. (Elizabeth Frantz/File Photo/File Photo/Reuters)
This would be an income per person that grows by $46,500 with stable debt, or $32,350 if debt increases rapidly – an increase of $14,250 individually and almost $36,000 per household if debt is stable.
Cost reductions and new tax revenues to improve the solvency of Social Security and Medicare will also help prevent an affordability crisis from reaching the elderly, who will face immediate benefit cuts if the trust fund that helps finance the program runs out in the next decade as it is currently projected.
Social Security faces a 22% shortfall in 2032 when the trust fund reaches projections, which would result in an automatic 22% cut for beneficiaries — about $500 a month in current monthly benefits.
The CRFB added that deficit reduction could help the U.S. better prepare for future recessions, which could lead to affordability challenges due to higher unemployment and slower income growth as well as higher government spending on aid programs. It can also prevent a future fiscal crisis due to the enormous growth of the national debt.
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“Responsible deficit reduction is not just an abstract concern for fiscal policymakers focused on spending and revenue; It is one of policymakers’ most powerful levers to make everyday life more affordable for American families,” CRFB said.