Former Treasury Secretary Robert Rubin said the US is in a “terrible place” with regard to its federal deficits, and called for tax increases to address the deterioration.

“The risks are enormous and some of them are materializing already, like higher interest rates,” Rubin said Wednesday on Bloomberg Television’s Wall Street Week with David Westin. The roughly 3-percentage-point surge in longer-term Treasury yields in recent years is due in part to the fiscal outlook and its impact on inflation, he said.

Risks are even greater today than in the early 1990s, when incoming President Bill Clinton crafted a budget-tightening package to shrink the deficit, Rubin said. The danger is that when markets are “out of sync with reality,” they can then “correct savagely” — as happened when Greek bond premiums over German ones soared during the euro crisis, he said.

“Looking forward, we’re having to deal with both spending and taxes,” Rubin said. But “when you get realistic about it, I think you’re going to have to largely” rely on the tax side, he said.

Rubin estimated that about 60% of the increase in debt from 2000 to 2022 came from tax cuts, which were implemented by Republican administrations. Without those reductions, the debt-to-gross domestic product ratio would be around 63% today rather than roughly 100%, he said.

Political Reality
While President Joe Biden’s signature spending packages had been paid for in their proposed form, Rubin said when they then went through Congress, “they came out some of them paid for and some of them not.”

Despite strong economic and job growth, the federal budget gap is now about 6% of GDP, a historically large figure, with rising interest costs on the debt one of the drivers. It points to longer-term fiscal risks that have spurred fresh warnings from economists, politicians and credit-rating agencies.

The top-line difference between the government’s spending and revenue figures is a perennial hot-button issue in Congress, and polarization in Washington has made it tougher for politicians to agree on deficit-trimming measures.

“There’s a lot of talk, but the talk is always divided politically between the Republicans who refuse to raise taxes, and the Democrats who won’t do entitlements,” he said. Rubin hoped that Washington will move to address the deficit after the November election, but added “I wouldn’t bet on it.”

The burgeoning deficit and broader debt burden are likely to be a key topic of debate in the campaign, especially as much of former President Donald Trump’s 2017 tax-cut package is scheduled to expire in 2025.

While measures to boost economic growth would help increase output and, as a result, shrink the debt burden, the US still needs to take steps to tighten the budget, Rubin said.

1990s Record
He added that further tax cuts advocated by Trump will only exacerbate the problem. “I don’t think it’s going to have any effect at all on growth,” Rubin said.

Rubin, first as head of Clinton’s National Economic Council, and then as Treasury secretary, oversaw a historic improvement in the federal budget during the 1990s. The Clinton administration enacted tax hikes and enjoyed a post-Cold War economic boom that helped shrink the fiscal deficit dramatically, even leading to surpluses by the end of the decade.

This article was provided by Bloomberg News.