EPIC’s latest resource is a compilation of the upcoming fiscal policy deadlines and inflection points that Congress and the President will confront before they know it.
Within the next decade, lawmakers will face some of the most consequential budgetary decisions in American history.
How policymakers respond at these inflection points – as well as to any unforeseen challenges that will likely arise – will determine the sustainability of the federal government.
2025 Is a Major Inflection Point
The first year of the next administration will be extremely consequential. 2025 will bring major inflection points that will affect Americans’ take-home pay, the federal budget, and more.
Major provisions from the 2017 Tax Cuts and Jobs Act (TCJA) will expire at the end of 2025, including the lower individual rates, child tax credit expansion, increased standard deduction, state and local tax deduction (SALT) cap, passthrough deduction, and Death Tax exemption, among other provisions. Pro-growth policies that reduce the tax disincentives against investment are phasing out or have expired, such as expensing for capital investments and research and development.
Allowing these tax cuts to expire would raise taxes for families and pass-through small businesses. Thanks to the TCJA, the typical family saw their tax burden reduced by about $3,000 in 2018.
Preventing the tax increases could increase the deficit by nearly $4 trillion over a decade relative to the current law baseline. That means the next round of tax reform should also clear out wasteful giveaways for special interests in the tax code and be paired with serious spending reductions.
The debt limit will be reinstated on January 1, 2025, after being suspended in June 2023 by the Fiscal Responsibility Act. Extraordinary measures will extend the X-date by which Congress must act until the spring or summer. Negotiations around the debt limit have historically served as an important opportunity to enact fiscal restraints.
FY 2026, which will begin on October 1, 2025, will be the first new fiscal year since the Fiscal Responsibility Act without enforceable statutory caps on discretionary spending. This means Congress will need to decide the proper levels of discretionary spending before October 2025.
Big Challenges Ahead
On top the challenges in 2025, the trust funds for the two largest programs in the federal budget face insolvency within the next decade.
According to the Social Security Trustees and the Medicare Trustees, these programs are rapidly approaching depletion. The Social Security Trust Fund will be depleted by 2033 and the Medicare Hospital Insurance Trust Fund will be depleted by 2031. When the trust funds are depleted, Social Security benefits would fall by 23 percent and Medicare hospital reimbursements would fall 11 percent.
The Congressional Budget Office makes similar projections, estimating that Social Security will be depleted slightly earlier than the Social Security Trustees project, and Medicare will remain solvent slightly longer than the Medicare Trustees project.
|Projected Trust Fund Depletion
|Social Security (OASI Trust Fund)
|Medicare (HI Trust Fund)
The status quo for Medicare and Social Security is not sustainable for the programs, for retirees, or for taxpayers. However, policymakers have an important opportunity to modernize these programs in ways that would maintain their original purposes and achieve even better results for both beneficiaries and workers.
Much of Congress’s Time Is Spent on Less than 1/3 of the Budget
A large part of the Congressional calendar each year is dedicated to negotiating the 12 regular appropriations bills, which now cover less than one-third of total annual spending.
Part of why so much time and political capital is invested into these appropriations bills is because of the important debates about the programs and policies funded in them.
Part of it is simply habit.
But part of the reason Congress spends so much effort on annual discretionary spending is because the current budget process was designed in a different era.
1974, when the Congressional Budget Act was signed by President Nixon, was the final fiscal year when discretionary spending made up the majority of total outlays.
Since then, autopilot (sometimes called “mandatory” or “direct”) spending programs have devoured most of the federal budget. In fiscal year (FY) 2024, autopilot spending and net interest costs will comprise 72 percent of total outlays, while discretionary outlays from annual appropriations will comprise only 28 percent. (Note: There is nothing “mandatory” about this 72 percent of spending; it is simply a function of Congress allowing these programs to grow unchecked. As such, I have chosen to use less misleading terminology.)
In inflation adjusted terms, autopilot spending has grown from $276 billion in FY 1962 to a projected $4.6 trillion in FY 2024. Between FY 1962 and FY 2024, annual inflation adjusted discretionary spending increased 210 percent while autopilot spending increased 1,554 percent.
To get our fiscal house in order, Congress will need to control the growth of autopilot programs and their associated interest costs.
This is not to say that discretionary spending is unimportant – far from it.
Controlling discretionary spending is vital to ensuring fiscal sustainability. Annual discretionary outlays totaling more than $1.7 trillion is a lot of taxpayer money.
Furthermore, the policy implications of appropriations are significant.
Important constitutional priorities such as national defense and foreign affairs are conducted using appropriated funds.
At the same time, more than $700 billion is spent on non-defense discretionary agencies each year, much of it funding a bureaucracy that has become woke, weaponized, wasteful, and bloated, stretching far beyond the proper roles of the federal government enumerated in the Constitution.
Lawmakers Need to Start Preparing Now
Too often, Congress and the White House lurch from manufactured crisis to manufactured crisis.
This short-term thinking gets in the way of effectively and efficiently planning for the challenges we know are coming, much less responding to actual unexpected events.
Given the gravity of the underlying fiscal situation and the looming policy inflection points, policymakers should begin preparing now. Addressing unsustainable spending and debt, controlling inflation, preventing harmful tax increases, dealing with the debt limit, and making changes to Medicare and Social Security will not be easy.
They will require long term strategies, not just short-term tactics.
Members of Congress should be having honest conversations with their constituents about the tough votes elected representatives will have to make. They should use the tools of the legislative process to start getting prepared, including holding hearings, meeting with experts and stakeholders, drafting potential legislation, and understanding the implications and tradeoffs of various approaches.
Candidates for president should use their bully pulpit to lead a frank national discussion about these issues. A recent poll found that 90 percent of likely voters believe that the 2024 candidates should discuss the challenges facing Medicare and Social Security and their proposed solutions.
The time to start thinking big picture and long term is now.
Download the Resource: Upcoming Fiscal Policy Inflection Points
See the two-pager Upcoming Fiscal Policy Inflection Points for download here.