The national debt is like the weather: Everyone talks about it, but nobody does anything about it.
Many members of Congress profess to be fiscally responsible, but talk is cheap. Actions, such as passing spending and tax-cut bills that increase the budget deficit and national debt, have consequences: Interest payments on the debt rise and the burden that creates could become serious.
First, some definitions. The deficit is the annual shortfall between revenues and expenditures. The debt is the sum of the past deficits minus any surpluses. Over the 1ast 50 years, a surplus has occurred exactly five times, four of them during the Clinton administration.
To control the growth in the national debt, you have to control the deficit, and a week ago, the House of Representatives voted on a constitutional amendment that would require balancing the budget. Sounds great, right? Only if you believe that those supporting the amendment actually care about balanced budgets.
Consider this: Almost every member of the House who voted for the amendment also voted for the tax cuts, which nearly everyone outside the White House says will expand the deficit greatly. Many of those same members also voted for the massive spending bill, which everyone, including the president, thinks will cause the deficit to surge.
How can someone vote for budget-busting/debt-increasing policies and also vote for a balanced-budget amendment? Simple: They’re politicians who love to say one thing while doing something else.
But politics aside, the rising deficits have implications, one of them being increased interest payments on the debt.
The national debt now stands at roughly $21 trillion, though about a quarter of that is Social Security. Net of Social Security, it is a little over $15 trillion. Given that GDP is roughly $20 trillion, it is doubtful we will pay off that debt anytime soon — if ever.
Knowing that paying off the debt is not happening, economists worry about the “burden of the debt.” This is annual interest payment on the debt compared with the ability to make those payments, which depends upon the size of the economy.
As long as that burden remains small, it is not an issue. When you make a lot of money, paying off a small loan is easy. But when the payments become significant, they affect the government’s ability to spend money on other programs and thus becomes a budget problem.
The problem arises because to borrow at reasonable interest rates, the U.S. government, like every other debtor, can never default. Otherwise, borrowing rates would surge and interest payments would rise dramatically.
And that is where the recent Congressional Budget Office estimates of future deficits and debt come in to play.
The CBO forecasts the deficit, which was $665 billion in 2017, will surge to more than $800 billion this fiscal year and approach $1 trillion next year. Claiming that you want a balanced budget is nice, but actions speak louder and the actions of this Congress will cause the deficit to widen dramatically.
Still, the burden is the cost of funding the debt, not the size of the debt. Here again, the pattern is disturbing.
Last year, interest on the debt totaled $263 billion. That was about 1.4 percent of GDP and about 3.5 percent of the budget. In both cases, the burden was not that different from historical percentages.
Unfortunately, the days of low interest rates are ending and the cost of funding the debt will likely jump. With just a moderate increase in rates, which the CBO assumes, interest payments will rise to nearly $500 billion in 2020 and more than $900 billion in a decade.
Those levels translate into debt burdens that are up to three times current levels and well above historic averages. By 2028, the national debt, as a percentage of GDP, could match the record set during World War II. At least then we had reason to create the huge debt.
And that is with just moderate interest rate increases. Faster growth, while adding to revenues, could cause inflation and interest rates to increase more than the CBO estimated, creating an even greater interest-payment burden.
The implications for government budget decisions of rapidly increasing interest costs are worrisome.
Interest payments come off the top and what is left goes to the remainder of the budget. If interest costs become too large, they could limit the ability to fund other programs.
To prevent interest costs from devouring the budget, Congress will likely have to either cut spending and/or raise taxes. Given the way Congress typically approaches budgeting, that will probably be done through lip service.