Our Debt Problem Is Really a Spending Problem. Economic Growth Won’t Fix It.

COMMENTARY Budget and Spending

Our Debt Problem Is Really a Spending Problem. Economic Growth Won’t Fix It.

Aug 18th, 2017 3 min read
COMMENTARY BY
Romina Boccia

Deputy Director, Thomas A. Roe Institute

Romina is a leading fiscal and economic expert at The Heritage Foundation and focuses on government spending and the national debt.
Interest payments on the federal debt, which are at historic lows, are likely to rise as the economy recovers. iStock

$269 billion. That’s a big number, and yet it’s not the amount the federal government spends on any of its major activities like Defense, Medicaid, Medicare, or Social Security.

Rather, this is what the Congressional Budget Office currently projects the federal government will spend on interest payments on the debt for fiscal year 2017. This makes interest the fifth largest federal budget item behind Social Security, Defense, Medicare, and Medicaid.

Nothing to worry about, right?

Only if you’re fine with spending a growing percentage of the federal budget on something that provides no service to the American people, other than paying for past bills.

Paying the net interest on the national debt is nothing like paying the interest on your car loan or your mortgage. With the national debt, there is no shiny car or spacious house waiting for you at the other end.

Although even in terms of payments, we’ve been relatively fortunate. Interest payments have been fairly low, despite the massive size of the national debt.

Interest rates—which help determine the size of interest payments—have been kept low over the past few years, thanks both to sluggish economic growth, the U.S. maintaining its position as a highly desirable location for investment, and the experimental monetary policies of the Federal Reserve.

However, with the economy now looking up and the Fed’s decision to raise its interest rate target, the Congressional Budget Office now predicts interest rates will “rise gradually over the next few years.”

Though, like any projection, the Congressional Budget Office’s interest estimates carry uncertainty.

U.S. creditors may eventually demand higher interest rates if they believe that the risk of default over the long run has increased significantly.

After all, the U.S. faces unsustainable fiscal projections and an apparent lack of political will to address the key drivers of spending and debt growth anytime soon.

Other factors could drive up interest as well. As Brian Riedl of the Manhattan Institute points out, the Congressional Budget Office projection “assumes no recessions, wars, terrorist attacks, tax cuts, or federal spending expansions.”

Riedl reminds us that current interest rates are unusually low compared to recent history. The interest rates of the 1980s, 1990s, and 2000s averaged 10.5 percent, 6.6 percent, and 4.5 percent respectively, compared to this year’s rough average of 2.5 percent.

Will interest rates ever rise again to such levels?

It’s uncertain. Past performance does not predict future outcomes. Under current projections, assuming low rates, interest rates on 10-year Treasury notes are projected to exceed 3 percent by 2020.

The effect on the budget from even this moderate increase in rates will not be small. The Congressional Budget Office projects interest payments to nearly double by 2021, and to eclipse military spending by 2027, reaching $818 billion.

By that time, interest payments would have risen to become the second largest projected budget item by 2027 (behind Social Security).

To regain control over interest payments and the national debt, lawmakers must reduce federal spending that drives growing budget deficits.

Social Security, Medicare, and Medicaid comprise well over half of the federal budget. They must be reformed.

The Heritage Foundation’s Blueprint for Balance draws a path to balance, including with entitlement reforms and better prioritization of federal programs. It balances in seven years, even after taxes will have been reduced from Obamacare’s full repeal.

Congress simply needs to act upon it.

This piece originally appeared in The Daily Signal