In 1987, former US president Richard Nixon visited vice president George H. Bush, who would contest the 1988 presidential election. The pair discussed how the supply-side ‘voodoo economics’ of Ronald Reagan had extended Washington’s consecutive deficits since the 1960s. Nixon warned Bush: ‘You’ve got to handle the deficit. You know there is going to have to be a tax increase.’

Bush’s political problem when president was twofold. One was the Democrat-controlled Congress blocked spending cuts. The other was that, when accepting the Republican nomination, he had pledged: ‘Read my lips. No new taxes’. What budget emergency prompted Bush in 1990 to break so key a promise that – in Bush’s later assessment – ‘it did destroy me’ politically? Bush confronted a federal deficit at 3.7 per cent of gross domestic product and federal debt ‘held by the public’ at 41 per cent of output.

Compare that with now. Washington’s debt ‘held by the public’ of US$26 trillion equals 98 per cent of GDP, says the Congressional Budget Office. By 2029, this ratio will top the record 106 per cent of output reached in 1946 due to World War II military spending. It will climb thereafter.

Federal debt is soaring because Washington keeps extending the consecutive budget deficits it has posted since 2001. President Joe Biden this year is overseeing an estimated shortfall of US$1.7 trillion, which equates to about 6.2 per cent of GDP. Demographic and other pressures mean the gap, untackled, will decline a touch by 2027 before rising towards 10 per cent of output thereafter.

Washington’s budget deficit might look manageable against the pandemic shortfall of 14.9 per cent of GDP of 2020. A better perspective, however, might a comparison with Australia’s pandemic splurge. Come the virus, Canberra showered money on health, households and businesses. How big was Canberra’s shortfall? It reached 6.5 per cent of GDP in 2020-21. Biden is thus injecting emergency-level stimulus absent an emergency.

Washington’s debt load is as irresponsible and it’s bigger than the budget office highlights. Flouting normal practice, the office focuses on a tally that excludes debt held by government agencies – US$6 trillion worth that can’t credibly be cancelled. When pushed to include this debt, the budget office places Washington’s gross debt of US$32 trillion at 124 per cent of GDP. The IMF, which uses the correct tally, says the US has the worst government-debt ratio among the 41 advanced economies, after Japan (258 per cent), Greece (166 per cent), Italy (140 per cent) and Singapore (135 per cent). Australia’s ratio is 59 per cent.

Washington’s future indebtedness is likely to be heavier than the budget office’s ‘baseline’ forecasts. The office assumes no change in laws, yet laws often embed expiry dates on tax cuts and benefits. When expiries loom, Congress will likely extend these benefits. Crunch time will be 2025 when US$3.6 trillion in tax cuts and US$350 billion in health subsidies expire. Include them and Washington’s debt reaches Italian levels of recklessness.

Another reason Washington’s finances will deteriorate is that key outlays, notably for aged healthcare (Medicare), health spending for the poor (Medicaid) and social security, are braced to rise under laws set outside the budget process. This means these expenditures are not reapproved every year. These ‘mandatory’ outlays that politicians dare not touch comprise 62 per cent of federal spending.

‘Discretionary’ expenditures are for air traffic control, disaster relief, education, foreign aid, immigration control, law enforcement, the military, national parks and the weather service. Politicians have little scope to reduce spending on such essentials. Another budget pressure is rising interest repayments. They are expected to hit a 25-year high of 2.5 per cent of GDP this year and climb thereafter.

The barrier to mending Washington’s finances is, of course, political. Enough lawmakers reject spending cuts, Republicans oppose tax increases and polarisation means the budget process has been weaponised. Under normal procedure, Congress would pass the twelve required money (appropriation) Bills that the president would sign into law before the fiscal year ends on 30 September. Disruptions to this timetable and threats of a partial government shutdown have occurred regularly since the mid-1990s. They are happening again this month.

More menacing is that raising Washington’s borrowing limit has been weaponised. Clashes over lifting the debt ceiling, which is unusually set outside the budget process, have only led to truces that postpone the next quarrel – this year’s fight set up a 2025 showdown. Debt-ceiling brinkmanship, which could ignite financial chaos if it led to a default, never leads to a solution. Fitch Ratings cited the ‘erosion of governance’ – read ‘political risk’ – when in August it stripped the US of its highest rating. S&P Global Ratings did likewise in 2011.

In political terms, Washington’s sick finances breach the ‘social compact’ concept that describes how governments gain political legitimacy from the governed. The term depicts how people forgo rights to live under a central authority that preserves other rights and performs certain functions. A budget’s role is to set the revenue and spending decisions that deliver the social compact.

One aspect of this is a budget should aim for ‘intergeneration equity’ – balance over time so the unborn aren’t repaying the debt of their grandparents. Other aspects are to tackle inequality, address challenges, boost productivity and macroeconomic management. The US budget fails to meet these criteria in any compelling way.

The fallout from Washington’s ailing finances could be profound. More flirts with default over the debt limit are guaranteed. More credit downgrades are likely. The US dollar might lose its hegemonic status. Foreigners might shun US Treasuries. Be warned; Washington’s finances are due a reckoning. Yet few care and those who do are powerless.

It’s true the fiscal stimulus is helping the US economy. And it will until events usher in austerity. It’s true too economists disagree about the risk of excessive debt. Japan’s government debt has exploded without a crisis. Why can’t Washington’s? It’s just that no country’s finances can unravel forever.

The danger with Washington’s budget mess is a financially violent denouement. Today’s politicians should heed Nixon’s advice to Bush.