The Real Fiscal Cliff: January 2015 Federal Budget Update

Feb 04, 2015

This continues our series on “The Real Fiscal Cliff” and is based on the most recent budget projection by the Congressional Budget Office made in January, 2015 (pdf).

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 2015 and 2025, the federal deficit will grow by a whopping 133 percent to $1,088 billion from $468 billion.

As a result, the size of the national debt will continue to grow as well. As shown in Chart 1, between 2015 and 2025 the national debt will grow by 62 percent to $21.6 trillion from $13.4 trillion. More troubling, the national debt will be growing faster than the economy going to 78.7 percent of Gross Domestic Product (GDP) in 2015 from 74.2 percent of GDP in 2015.

Chart 1 Federal Debt Soars 2015 to 2025 Based on CBO January 2015 Update.jpg

Additionally, interest payments on the national debt will also be on the rise. Interest payments will also 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 elimination of slack in the economy will eventually remove the downward pressure on the rate of inflation and on interest rates that has existed for the past several years. By CBO’s estimates, the rate of inflation as measured by the price index for personal consumption expenditures will move up gradually to the Federal Reserve’s goal of 2 percent, hitting that mark in 2017 and beyond. Interest rates on Treasury securities, which have been exceptionally low since the recession, will rise considerably in the next few years, CBO expects, but remain lower than they were, on average, in previous decades. Between 2020 and 2025, the projected interest rates on 3-month Treasury bills and 10-year Treasury notes are 3.4 percent and 4.6 percent, respectively.”


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. Nominal interest payments will grow by 265 percent to $827 billion in 2025 from $227 billion in 2015 while interest payments as a percent of GDP will grow by 139 percent to 3 percent in 2025 from 1.3 percent in 2015.

Chart 2 Interest Payments on Federal Debt Soars 2015 to 2025 Based on CBO January 2015 Update.jpg

However, unlike previous reports, CBO is no longer projecting interest payments to exceed the budget deficit as shown in Chart 3. This is not good news as it would first appear. Rather, the deficit is now project to explode in the later years and will again top $1 trillion in 2025. Of course, this means that interest payments will be even higher post-2025, but that is conveniently beyond the CBO’s current projection window. Uncle Sam is still very much on the path to bankruptcy.

Chart 3 Interest Payments Equal to Three Fourths of the Budget Deficit in 2025 Based on CBO January 2015 Upate.jpg

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 Control 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 federal deficit that is over 25 percent larger than forecasted by the CBO 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 for Uncle Sam will come even sooner.

Concord Coalition January 2015 Plausible Federal Baseline.jpg

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