April 27, 2023 by Ed Barno
We are beginning to hear more about the accumulated Federal debt. Why? The U.S. has been running an annual budget deficit for almost as long as we can remember. The last year with a budget surplus was 2001. The Federal Government typically runs a manageable annual deficit.
In times of significant economic challenge or other crises, the annual deficit often spikes. Think wars, financial crises (2008 – 2009), a pandemic! To pay for these deficits, the Federal Government borrows money by selling Treasury securities - Treasury bills, notes and bonds. The expected deficit for the current fiscal year (the Government’s fiscal year runs from Oct 1 to September 30) is close to $1.5 trillion, more than 20% above what was budgeted.
The gross amount of the current accumulated Federal debt is approximately $31.5 trillion. The amount of the accumulated debt and the cost of carrying that debt (interest expense) need to be viewed in context. The accumulated debt is most often viewed as a percentage of our GDP (Gross Domestic Product).
In 2000, the debt was $5.7 trillion and 55% of GDP. In 2010 following the financial crisis of 2008 – 2009, the debt reached $13.6 trillion and 90% of GDP.
In 2022 following the fiscal response to COVID, the deficit reached $30.8 trillion and 123% of GDP.
The World Bank says that if the debt-to-GDP ratio exceeds 77% for an extended period, it will cause economic growth to slow.
The U.S. ratio has been above 77% since 2008. GDP growth in the U.S. has been low, with few exceptions, since 2000.
The cost of carrying this debt, interest expense, is possibly more important than the amount of the debt itself. And, of course, the total interest cost is a function of interest rates and the amount of the debt. Most of the securities funding our current debt were issued in times with abnormally low interest rates.
The net interest cost on our debt in the current Federal Budget is $396 billion, 6.8% of budget outlays. The Government uses “net” interest expense, which is gross interest expense on our debt less interest income that flows through various Federal entities and programs.
With current interest rates being significantly higher than they have been for many years, the cost of refunding the current debt and funding new debt will materially increase the net interest cost that is included in our annual Federal Budget. This will cause us to run larger annual budget deficits, further increase the accumulated debt, etc., etc.
So does the amount and cost of the Federal accumulated debt matter? Absolutely, and more and more so. How can we address the rising debt level and its associated cost?
Promoting higher growth in the economy?
Restricting growth in or decreasing Government spending? Raising revenues (taxes)?
What can we expect from our Government representatives (both parties), whose focus is usually short-term in nature?
There will be no easy answers or solutions. At a minimum, we should expect our elected representatives and those who wish to be elected to address how they believe this growing challenge should be met.