Whoever prevails in this year’s presidential election will inherit a fiscal mess, the magnitude of which is only now becoming apparent. The federal budget deficit, having bottomed out last year at “only” $439 billion, is on the rise and threatens to breach the $1 trillion threshold once again. Perhaps the most troubling aspect of this fiscal deterioration is the key role played by rising net interest costs on the federal debt.
{mosads}In 2008, the fiscal year coinciding with the onset of the so-called Great Recession, federal net interest costs totaled $253 billion on a gross debt of approximately $9.4 trillion. Then interest rates collapsed and the gross federal debt more than doubled. The result? Annual net interest costs fell to $187 billion in 2009 before inching back up to a record $255 billion this year.
Much like an introductory credit card offer, the sustained but temporary collapse in interest rates masked the burden of running up the federal debt and deluded policymakers into thinking this was a problem for another day. But now that day has arrived. As interest rates normalize and the debt continues to grow, federal net interest costs will explode.
According to the Congressional Budget Office’s (CBO) latest projections, net interest outlays are expected to grow roughly 20 percent for each of the next three years. By 2019, net interest costs are expected to jump from $255 billion to $438 billion — an increase of nearly 72 percent.
Within another seven years, annual interest costs are expected to total $830 billion. In other words, net interest costs are poised to more than double as a share of gross domestic product (GDP) and more than triple in nominal dollars.
It will not be easy to offset or pay for that added interest expense. The $575 billion difference between what we pay now and the $830 billion we’ll pay in 2026 is roughly the equivalent of Argentina’s annual economic output.
Not surprisingly, interest on the debt promises to play havoc with the federal budget. Although it varies from year to year, increased interest costs will consume anywhere from 25 cents to 60 cents of every new dollar of tax revenue for the foreseeable future.
With interest payments consuming such a large share of new revenue and the CBO’s projection that mandatory federal spending will increase 68 percent over the coming decade, the federal budget deficit is on track to grow to a new record of $1.4 trillion by 2026.
And that’s not even the worst-case scenario. The CBO estimates a 1 percentage point increase in interest rates above current projections would add another $1.6 trillion to the cumulative budget deficit over the decade. By comparison, the Budget Control Act of 2011 — the largest deficit reduction measure adopted in a generation — produced 10-year savings of somewhat more than $2 trillion. In other words, a small increase in interest rates would wipe out the vast majority of those savings.
A small but hopeful cadre of policymakers and budget experts is sounding the alarm. The esteemed Committee for a Responsible Federal Budget warns that “Even under current projections, interest spending threatens to crowd out other important priorities, and our high level of debt puts the country’s finances at substantial risk if interest rates rise further than expected.”
Former presidential candidate and current Sen. Rand Paul (R-Ky.) added his voice earlier this week, saying “The only way to accommodate this [increased spending on interest] is with higher taxes or reduced services, or worse still, borrowing more just to pay the interest on what we have already borrowed. In other words, taking a cash advance on one card to make the payment on another — at some point it all crashes down.”
Of course, there are no easy solutions but, considering the enormity of this problem, we should be dismayed by the relative silence from most of the presidential candidates. The message may be too dreary for the campaign trail, but the candidates owe it to voters to acknowledge this fiscal juggernaut, and maybe even present a plan to resolve it. Someone will inherit this fiscal mess on Jan. 20, 2017 and they cannot ignore it forever.
But then again, as Conan O’Brien once quipped, “When all else fails, there’s always delusion.”
Carter was a deputy assistant secretary of the U.S. Treasury under President George W. Bush and served on the staff of the Senate Budget Committee.