Why Debt Levels Matter
And all the alternatives available to lower It
By Vaughn L. Woods, CFP, MBA
Research (Reinhart & Rogoff, 2010) shows that when a country’s debt goes above 90% of its Gross Domestic Product (GDP), growth tends to slow down. For the U.S., we’re on track to hit 118% by 2035, which is way past the “safe zone.” Why does this matter? Slower growth means less money coming in for the government-about $3 trillion less over the next decade if growth drops by just 1%. That’s a big deal for everything from jobs to pensions to public services1.
Locally, San Diego faces its own challenges. The city expects a $1.02 billion deficit between 2026 and 2030. That has already led to hiring freezes, reduced library hours, and more parking meters. High interest rates aren’t helping either, rents are up. You now need to make over $50 per hour to afford the average apartment.
Why Big Deficits Hurt
When the government borrows a lot, it competes with everyone else for loans, which pushes up interest rates. That makes it harder for people to buy homes or start businesses. More of our tax dollars go to paying interest instead of building roads, funding schools, or investing in new tech. Plus, when debt is high, there’s less room to respond to emergencies-like a recession or a natural disaster.
Five Main Ways to Tackle the Deficit
There’s no magic bullet here. Most experts agree that a mix of strategies is needed. Here’s a look at the main options, with their pros and cons:
- Inflation
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- How it works: Inflation can make old debt cheaper in today’s dollars and can boost tax revenues if incomes rise.
- The catch: High inflation is risky. It hurts purchasing power, makes borrowing more expensive, and can shake confidence in the economy. Most economists see it as a side effect, not a real strategy.
- Budget Cuts
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- How it works: Cut government spending-either discretionary (like education or defense) or mandatory (like Social Security and Medicare).
- The catch: Discretionary cuts don’t go far since most spending is on entitlements. Cutting Social Security or Medicare is politically tough because so many people rely on them. Still, serious deficit reduction almost always involves some spending restraint.
- Lower Taxes to Boost Growth (Supply-Side Economics)
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- How it works: Lower tax rates to encourage more work, saving, and investment, which could lead to more growth and, ideally, more tax revenue.
- The catch: Most studies, including from the Congressional Budget Office (CBO) and Tax Policy Center, find that tax cuts rarely pay for themselves. They can help growth a bit, but usually not enough to offset the lost revenue-unless paired with spending cuts or targeted tariffs.
- Tariffs
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- How it works: Tax imports to raise revenue.
- The catch: Tariffs can backfire by raising costs for businesses and consumers, slowing down the economy, and inviting retaliation from other countries. The net effect is hotly debated, but most economists are skeptical that tariffs alone can fix the deficit.
- Other Big Strategies
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- Broad-based tax increases or tax reform: Raising rates, closing loopholes, or adding new taxes, like a Value Added Tax (VAT) or carbon tax, can bring in more money. The CBO has a long list of options here.
- Entitlement reform: Adjusting Social Security and Medicare-like raising the retirement age or changing benefits-could make a big dent in future deficits, but it’s a political minefield.
- Sustained economic growth: Investing in education, infrastructure, and innovation can help grow the economy, making the debt more manageable as a percentage of GDP.
- Better tax collection: Closing the “tax gap” by improving IRS enforcement could bring in more revenue without raising rates.
- Fiscal rules and budget reforms: Setting spending caps or debt targets can help keep things in check over time.
What’s Worked in the Past?
The U.S. has managed to shrink deficits before-usually with a combo of strong growth, higher taxes, and spending restraint. For example, in the 1990s, a mix of tax hikes, budget caps, and a booming economy did the trick. After big wars, cutting military spending has also helped.
What’s Next?
Most experts say that a sustainable fix will need to hit both spending and revenue. Relying on just one strategy usually isn’t enough and can cause other problems. It also takes political will-these choices aren’t easy, and they affect real people. The upcoming budget votes will show whether there’s enough support to make tough changes stick.
What About San Diego?
The city is facing tough choices too-cutting spending, finding new revenue, or both. High housing costs and a tight budget mean local leaders need to be creative and realistic. The same principles apply; there’s no one-size-fits-all solution, and every option has trade-offs.
Wrapping Up
Deficit reduction isn’t just about numbers-it’s about making hard choices that affect jobs, services, and the future of the economy. A balanced approach, grounded in reality and backed by solid research, is the best way forward. If you have questions about how these issues could affect your own finances or planning, let’s talk.
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Thanks for reading!
Sincerely Yours,
Vaughn Woods, CFP, MBA
Vaughn Woods Financial Group, Inc.
2226 Avenida De La Playa
La Jolla, CA 92037
858-454-6900
Sources:
Congressional Budget Office
Reinhart & Rogoff (2010)
FEDweek
City of San Diego Department of Finance
10News
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