The Real Fiscal Cliff: August 2014 Federal Budget Update

Sep 09, 2014

This is an update of the recent post, “The Real Fiscal Cliff: Interest Payments on the National Debt,” based on the most recent budget projection by the Congressional Budget Office made in August, 2014 (pdf). Unfortunately, there is no good news in the new report.

As we found before, Uncle Sam is simply unable to contain his profligate spending with red ink as far as the eye can see. Between 2014 and 2024, the federal deficit will grow by 34 percent to $722 billion from $537 billion—slightly slower than reported in April. However, there is room for dispute which I will get to in a moment.

As a result, the size of the national debt will continue to grow as well. As shown in Chart 1, between 2014 and 2024 the national debt will grow by 61 percent to $20.1 trillion from $12.8 trillion. In fact, the national debt will even be growing faster than the economy going from 74.4 percent of Gross Domestic Product (GDP) in 2014 to 77.2 percent of GDP in 2024.

Chart 1 Federal Debt Soars 2013 to 2024 August 2014 Update.jpg

Additionally, interest payments on the national debt will also be on the rise. Interest payments will be growing not only because of higher debt, but also because interest rates are expected to increase. Here is what CBO said about interest rates on the national debt in a recent post:

“The 10-year Treasury rate began rising from very low levels in 2012 and is currently close to 2.4 percent, still low by historical standards. That rate will be pushed up over time by market participants’ expectations of an improving economy, the rise in short-term interest rates, and an end to the Federal Reserve’s purchases of long-term Treasury securities and mortgage-backed securities, CBO anticipates.”

“The projected increase in market interest rates would affect the government’s borrowing costs as the Treasury replaced maturing debt and issued additional debt to finance budget deficits and for other means of financing. CBO projects that, under current law, the average interest rate on debt held by the public—calculated as net interest divided by debt held by the public—will rise from 1.8 percent this year to 3.9 percent a decade from now.”



Chart 2 shows the result of growing interest payments. Whether you look at interest payments in nominal dollars or as a percent to GDP, the interest burden will increase tremendously. In fact, interest payments as a percent of GDP will grow by 123 percent to 3 percent in 2024 from 1.3 percent in 2014.

Chart 2 Interest Payments on Federal Debt Soars 2013 to 2024 August 2014 Update.jpg

However, the CBO does not go far enough in their analysis. They fail to point out that, as shown in Chart 3, interest payment on the national debt will exceed the federal deficit for the first time in 2024. This means that, on the margin, all of Uncle Sam’s borrowing is going just to service the federal debt. This is the very definition of bankruptcy!

Chart 3 Interest Payments Exceed Budget Deficit in 2024 2013 to 2024 August 2014 Update.jpg

Of course, while the CBO is the official scorekeeper for the federal government, their assumptions may not always be the correct ones. As such, I recently came across this very interesting analysis of the federal budget published by the Concord Coalition called their “Plausible Baseline:”

“The Concord Baseline makes some key assumption changes to the CBO baseline. CBO is required to assume that congressional appropriations continue increasing at the rate specified in law -- following the budget caps and sequester policy enacted in the 2011 Budget Controll Act. For tax legislation, they assume current law will govern -- so if there are tax cuts that have sunsets, CBO is required to project revenues assuming the tax cuts expire as written in the legislation. They also project economic growth in a very conservative fashion -- they do not try to anticipate major changes in the economy, either recessions or accelerations.”

“The main assumptions in the Concord Plausible Baseline are that war spending draws down over 10 years, that the rest of discretionary spending increases to keep up with inflation, that Medicare physician payment cuts (under the Sustainable Growth Rate (SGR)) are postponed, as they have been for the last several years, and that small tax cuts often extended on an annual basis are continually extended. Finally, we add CBO's calculation for the increased debt service (interest payments) that these policies (both on the tax and spending side) would cause by their increasing the deficit. No changes are made to CBO's economic assumptions.”

The end result of these changes by the Concord Coalition is a much larger federal budget deficit over the 2014 to 2024 time-period as shown in their chart below. Of course, a larger deficit means more debt and higher interest payments. As a consequence, the day of reckoning will come even sooner.

Concord Coalition Plausible Baseline CBO August 2014.jpg

J. Scott Moody

Scott has nearly 20 years of experience as a public policy economist. He is the author, co-author and editor of over 180 studies and books. His professional experience also includes positions at the American Conservative Union Foundation, Granite Institute, Federalism In Action, Maine Heritage Policy Center, Tax Foundation, and Heritage Foundation.

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