President Joe Biden is taking victory laps for last year’s narrowed budget deficit. No one would be happier than me to see that number drop significantly. But the drop has nothing to do with the president’s policy, and it does little to change the dangers of our fiscal situation.
According to the Treasury Department’s monthly reports, we know that the budget deficit for May was $66 billion. So far, the deficit for fiscal year 2022 is $426 billion. Four months from the end, this year’s deficit will indeed be significantly lower than last year’s, which was nearly $2.8 trillion. There’s nothing quite like $5 trillion in COVID-19 relief spending paid for with borrowed money to inflate a deficit!
The Biden administration did nothing to cause the deficit to decline. Credit really goes to the big increases in tax revenue as the economy rebounded, combined with the Sens Democrats’ decision. Kyrsten Sinema and Joe Manchin and their fellow Republicans to block Biden’s costly ‘Build Back Better’ proposal. The BBB would have made many of the emergency programs created or expanded during the pandemic permanent, and if passed, government spending and deficits would be even higher than they are today.
That said, the deficit still too close to $1 trillion for fiscal year 2022 is inexcusably large. More worrisome is the cost that we, the taxpayers, are bearing due to pre- and post-COVID-19 deficits. According to that same Treasury report, in May the US government paid $56 billion in interest on its debt, up from $44 billion in April. Currently, total interest payments for this year are $311 billion. With four months still on that figure, we can assume a total interest cost for fiscal year 2022 of at least $500 billion.
This is just the beginning. Before the pandemic and inflation triggered by irresponsible government spending and easy money, the Congressional Budget Office predicted that by 2050, interest payments on US debt would consume 8% of GDP and 40% of revenue public. These projections assumed modest increases in interest rates over a long period. However, so far, the short-term numbers look optimistic as inflation and the Federal Reserve’s response to it drive interest rates higher.
Higher interest rates today will increase interest payments soon after because much of our debt is short term. According to the Treasury, total interest on marketable debt in May was 1.73%, down from 1.66% in April, and rising. At this rate, we could reach 2% by the end of the year. A calculation by Jack Salmon of the Mercatus Center reveals that a 1% increase in interest rates would result in annual interest payments of $1.06 trillion, while a 2% increase would bring those annual payments to $1.06 trillion. .45 trillion dollars.
It’s expensive, sure, but it’s also a vicious circle if the interest is paid with even more borrowing. More borrowing increases total interest payments. Also, if one believes (as I do) that most of our current inflation is rooted in recent fiscal irresponsibility, then more borrowing to pay more interest will only add more fuel to the fire of inflation.
Finally, as the average interest rate on marketable debt approaches 2%, we are approaching the threshold that some leftist economists believe should raise concerns about the size of public debt.
In 2020, economists Jason Furman and Lawrence Summers didn’t care. Interest rates were historically low and seemed destined to stay low. Yet, for academic rigor, they set a few markers for when we might start worrying about debt: move above 2% of GDP over the next decade.
Today, debt held by the public is about 98% of GDP, so with an interest rate of 1.734%, we are currently spending 1.7% of GDP on interest payments. If the Federal Reserve has to raise rates much more than expected to bring inflation under control, we should really start to worry.
In other words, the budget deficit could be lower than at the height of the pandemic, and that’s a good and predictable thing. But that’s no cause for celebration, as interest rates and service charges could push us into worrying territory sooner than we think.
— Véronique de Rugy is the George Gibbs Chair in Political Economy and Senior Fellow at the Mercatus Center at George Mason University. To learn more about Véronique de Rugy and to read articles by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate webpage at www.creators.com.