President Joe Biden is celebrating the decreased budget deficit from the previous year. No one would be happier than me if we saw a large decrease in this figure.
However, the reduction is unrelated to the president’s policies, and it makes little difference in terms of the risks posed by our current budgetary condition.
We are aware that the budget deficit for May was $66 billion based on Treasury Department’s monthly reports.
The fiscal year 2022’s current deficit is $426 billion. With only four months left, this year’s deficit, which was close to $2.8 trillion last year, will in fact be substantially smaller. Nothing will blow up a deficit like $5 trillion in borrowing to pay for COVID-19 relief spending.
Nothing was done by the Biden administration to reduce the deficit. The recovery of the economy and the choice by Democratic Senators Kyrsten Sinema and Joe Manchin, together with their Republican colleagues, to defeat Vice President Biden’s pricey “Build Back Better” programme are largely responsible for the substantial improvements in tax revenues.
If BBB had been implemented, government expenditures and deficits would currently be larger than they are since it would have made many of the emergency programmes established or increased during the epidemic permanent.
However, the FY 2022 deficit, which is still too close to $1 trillion, is excessively high. The expense that we taxpayers must bear as a result of the deficits before and after COVID-19 is more concerning.
The U.S. government paid $56 billion in interest on its debt in May, up from $44 billion in April, according to the same Treasury data. The entire amount of interest paid so far this year is $311 billion. We can predict that the overall interest expense for FY 2022 will be at least $500 billion with four months left in the year.
The prospect of US debt is terrifying.
This is only the start. The Congressional Budget Office predicted that interest payments on U.S. debt would account for 8% of GDP and 40% of government revenue in 2050, before the epidemic and the inflation sparked by reckless government spending and easy money.
These estimates included a long-term assumption that interest rates would only gradually rise. The short-term projections, however, appear optimistic as of right now because interest rates are rising due to inflation and the Federal Reserve’s response to it.
Given how much of our debt is short-term, higher interest rates today will cause interest payments to increase quickly after.
Total interest on marketable debt increased to 1.73 per cent in May from 1.66 per cent in April, according to the Treasury. By the end of the year, if we continue in this direction, we might hit 2%.
According to a study by Jack Salmon of the Mercatus Center, a 1% rise in interest rates would result in yearly interest payments of $1.06 trillion, while a 2% rise would raise them to $1.45 trillion.
It is undoubtedly expensive, but if the interest is paid by taking on further debt, it becomes a vicious cycle.
Total interest payments increase as borrowing increases. Additionally, if one thinks—as I do—that recent fiscal irresponsibility is largely to blame for our current inflation, then additional borrowing to pay for more interest will just stoke the inflation fire.
Finally, we are approaching the level that some left-leaning economists claim should raise worries about the magnitude of government debt as the average interest rate on marketable debt hits 2 per cent.
Jason Furman and Lawrence Summers, two economists, weren’t concerned about this in 2020. Interest rates were exceptionally low and appeared certain to remain that way. However, they provided certain benchmarks for when we might begin to worry about the debt out of academic rigour:
“As a new benchmark, we suggest fiscal policy should concentrate on fostering economic expansion while preventing real debt service from being forecast to climb quickly or to reach above 2 per cent of GDP over the future decade.”
With the national debt currently amounting to around 98 per cent of GDP and an interest rate of 1.734 per cent, we are currently spending 1.7 per cent of GDP on interest payments. We should start to be concerned if the Federal Reserve is forced to raise rates more than anticipated to control inflation.
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In other words, it is likely and excellent that the budget deficit will be lower than it was during the pandemic’s peak. However, there’s no reason to celebrate because interest rates and servicing prices may swiftly bring us into an unsettling area.
