As we mark the dawn of a new fiscal year for the U.S. government, the fireworks are staying in the box. There is little to celebrate from the year that just ended — and plenty to do in the year ahead, from reaching agreement on 2025 budget and tax policies to addressing longer-term fiscal challenges.
For the fiscal year that ends today (September 30), the Congressional Budget Office estimates the budget deficit at $2 trillion — $7 trillion in spending compared with $5 trillion in revenues. A deficit of that size is remarkable given the year lacked a pandemic, a financial crisis, or a direct U.S. war. It shows the structural deficiency plaguing the U.S. fiscal condition: Spending far outweighs revenues, year after year, even when nothing extraordinary happens.
A wide range of fiscal matters will occupy federal policymakers in the new year, but the only resolutions made with true determination will be of the continuing variety. That is continuing resolutions — or in Washington parlance, CRs. Like the law just passed to fund the government through December 20, CRs are used when the government cannot complete its annual budget process on schedule. That has been the case every year since 1998, with CRs averaging more than four months in duration before full-year funding is approved.
At least Congress managed to pass a CR this year, which has not always been the case, averting a government shutdown while pushing budgetary decisions to after November’s election.
Will A Fiscal Cliff Reappear In 2025?
The new year comes with precipitous fiscal issues to address: From getting funding in place for the new year, increasing the debt ceiling, determining whether and how to extend tax cuts, and accommodating the budgetary priorities of a new president and Congress.
The news that the government will avoid a shutdown — at least for the first 3 months of the year — is good. But the risk of a funding lapse will remain until full-year funding is put in place. And besides, the term shutdown is misleading: Rather than saving money (which the word evokes), shutdowns increase taxpayer costs by forcing federal employees to not work for weeks at a time, then giving them back pay once the government is reopened. According to the Congressional Budget Office, a shutdown in 2019 cost taxpayers $3 billion to keep 300,000 federal employees at home and idle for five weeks.
Assuming full-year funding is provided by Congress in the next several months, attention will shift to extending the debt ceiling — a self-imposed limit on paying the government’s bills. That ceiling has been suspended since June 2023, but will be reimposed on January 1, 2025. Failure to extend the borrowing limit could negatively impact the stock market and overall economy, precipitating job losses, higher interest rates, and reduced access to credit. Despite that importance, the threat of political gamesmanship is high.
Some legislative focus will also shift to the Tax Cuts and Jobs Act (TCJA) of 2017, better known to some as the Trump tax cuts. Many of that law’s provisions sunset at the end of 2025, including lower marginal income tax rates, a higher standard deduction, fewer itemized deductions, and a $10,000 cap on state and local taxes. A notable exception is the principal tax cut in TCJA — a 21% flat corporate tax rate that does not expire. Whether and how the TCJA is extended will be influenced significantly by the outcome of the upcoming election.
Will A New President And Congress Redirect Fiscal Priorities?
The new president will have an opportunity to set his or her fiscal priorities through a budget request in the spring of 2025. Items in need of attention include:
- Social Security and Medicare. Unless changes are made, trustees for these programs report that fund reserves will be depleted in the 2030s. In this scenario, the programs would be forced to reduce benefits.
- Emerging national security threats. Today’s national security challenges include evolving threats in the Middle East, Asia, and Africa, and from non-state actors. Security concerns include the proliferation of weapons of mass destruction, cyberattacks, disinformation, and supply chain disruptions. A congressionally chartered commission issued a report last year recommending changes to how the U.S. budgets for these new threats.
- Emergencies. As emergencies rise in both severity and incidence — Hurricane Helene being the latest example — there is a need for a more integrated and effective budgetary approach to mitigate consequences from natural disasters, pandemics, and national security threats.
- Management practices. With hundreds of billions of dollars lost to fraud during the COVID-19 pandemic, there is a need to reconsider how the government protects taxpayer dollars.
- Tax policy. Beyond TCJA extension, the two presidential candidates have offered sharply divergent proposals to change how the government is funded. Whether such proposals are seriously pursued is an open question.
A New Year’s Resolution
As the new fiscal year begins, the government would benefit from having at least one central and achievable fiscal improvement goal. In a previous post on Forbes.com, I wrote about the country’s increasingly unworkable budget process and its precarious fiscal condition. (To illustrate: Annual interest payments on the national debt now exceed defense spending.) Legislation has been introduced in Congress to create a national fiscal commission to devise policies to get the country back on a sustainable fiscal path, reviving a proposal twice attempted in the 2010s. That idea could benefit from a new approach.
Achieving any New Year’s resolution often requires breaking down goals into manageable tasks. A narrower working group could explore budget concepts and processes to modernize budgeting. Such a group could sew the seeds of bipartisan fiscal cooperation, and lay the groundwork for a national fiscal commission to propose specific policies. Such progress would not only improve the country’s fiscal outlook and also help to reverse declining levels of trust in government.
A new year with a new president and Congress offers an opportunity to advance fresh ideas. The United States should make the most of it with an achievable fiscal New Year’s resolution.