• Budget projection with debt interest

    I’ve long yearned for a long-term budget projection that includes debt interest. I’m told by folks who know better that CBO doesn’t include debt interest in its long-term projections because they’re too uncertain. I’m not satisfied with that, and neither are the House Republicans. They pulled together CBO and OMB numbers to produce the following chart, which includes interest on the debt.


    The vertical axis is percent of GDP. The figures are proportionally consistent with something I’ve posted before.

    Using some set of assumptions (I know not what, but presume they include an “under current law” forecast), interest on the debt will consume about as much of the federal budget as will all health care spending by 2040. By 2060, interest on the debt will be akin to another entire federal budget. By 2080 debt interest will be larger than the entire federal budget. Meanwhile, if future government revenue is no higher than it has ever been in the past, relative to GDP (~19%), we already cannot afford the government we have, let alone the interest payments on it.


    You know what doesn’t grow much, especially relative to the other stuff? It’s right there in red and purple: Social Security and “all other government”. The latter is non-entitlement, discretionary spending. You know, the target of cuts in the current conversation, the very thing argument over which could cause a government shutdown. We may have some uncertainty about these forecasts, but I don’t think we can have any uncertainty about how much a focus on that type of spending is going to do. Shut the government down, yell from the rooftops, jump up and down, but even cutting every dime of it — a political impossibility and a far cry from anything anyone is proposing — won’t do much good in the long  run.

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    • And that’s also without breaking out Defense spending from the rest of the red…

    • Excuse me if I don’t understand what you are saying, but wouldn’t reducing any form of spending to reduce expenditures below federal revenue eliminate (or at least reduce) our future debt obligation?

      Not that I don’t agree we need to do something about health spending but if cuts are there in “other government” then there is nothing wrong with addressing them.

      • @pck – I’m saying what we are fighting over won’t do much. It’s not like we can cut all of that discretionary spending. At best we could cut a minuscule fraction. That’s rounding error relative to the real problem. I’m sure you can see what that is!

    • pck:
      If revenues exceed outlays, then we have a surplus, which then pays down the debt held by the public.
      On http://www.econospeak.blogspot.com, the current article’s author expresses whether we should ever pay off our debt held by the public, when other countries don’t do so.
      A commenter wonders why we should pay interest on our debt, for the debt itself was “created” by the government.
      It’s almost as if the debt or liability side is not real, but the asset side is real.
      We can use the assets to pay for current government expenses and ignore the principle of the liability.
      Instead of paying off principle, it is more prudent to simply roll it over and never pay it back.
      This seems very nonsensical to me, for how can you have an asset without a corresponding liabillity?
      We use the asset now, and defer even recognizing the liability, forever.
      Don Levit

    • 2080?

      how many economists in 1940 accurately predicted today’s budget ?

    • Interest payments on the debt include a large component that merely reflects inflation, and are not “spending” in the same sense that entitlement programs are. As long as government debt pays little more in real terms than the US’s rate of GDP growth, the best indicator of the sustainability of our fiscal trajectory is the primary deficit as a fraction of GDP.

      Of course, if bondholders have some crisis of confidence, or the US loses its status as a reserve currency and the demand for dollar-denominated assets falls, the real interest rate might rise above the rate of GDP growth. But given the low real interest rates that countries like Japan pay, I find it unlikely that ‘r’ will go much higher than ‘g’ (unless there is an extreme crisis, which is of course endogenous to this entire discussion).

      There’s no question that the US is in a dangerous fiscal situation. But including nominal interest payments as a spending category is highly misleading, and tends to be used as a political device to sway people who are less informed about the underlying economics.

      • @Random Grad Student – I’m interested in this part: “As long as government debt pays little more in real terms than the US’s rate of GDP growth …” What is known or knowable about the return on government debt? Not snark or a rhetorical question. I want to know, as it is the lynch pin to the argument.

    • While the interest on the debt held by the public is low, due to the very low interest rates, we have some new public debt coming up that has nothing to do with the traditional expenses exceeding revenues.
      For example, the Social Security and Medicare Trust funds now have outgo exceeding income, and that difference is transformed from intragovernmental debt into debt held by the public.
      The civilian and military trust funds work the same way, so when expenses exceed income, the difference is added to debt held by the public.
      And, the liabilities for federal employees is more than intragovernmental debt.
      This reduction of intragovernmental debt and increase in debt held by the public is important for debt held by the public has an immediate impact on the budget due to interest.
      Intragovernmental debt pays interest, but it does so in the form of Treasury securities, so no immediate budget impact.
      By the way, is the government’s inability to pay down principle effecting the full faith and credit of the U.S. Government.?
      Don Levit

    • I’m wondering if there are any projections similar to this using various changes in revenue. What does it look like if the Bush tax cuts are allowed to expire? If they are renewed? If there are changes to capital gains, deductions, and many other options that have been proposed? And what about the reverse, if we accomplish reductions in health spending, what effect will that have on debt interest?