Where Federal Debt is Headed and Staying Off the Interest Payments Treadmill

Where Federal Debt is Headed and Staying Off the Interest Payments Treadmill

Timothy Taylor 24/09/2020 3
Where Federal Debt is Headed and Staying Off the Interest Payments Treadmill

By now, it's old news to anyone paying attention that the federal debt, based on current law, is on a trajectory to rise in an unsustainable way over the next few decades.

What is less well-known, I think, is the extent to which these forecasts for rising federal debt rely on interest payments soaring out of control. The message comes through clearly in the Congressional Budget Office report "The 2020 Long-Term Budget Outlook" (September 2020). 

Here's the CBO projection for where federal debt is headed, based on current law. The federal debt/GDP ratio is now on the verge of surpassing its previous high, which was the debt incurred to fight World War II. These debt projections are typically viewed as conservative, because Congress often passes laws that suggest taxes will be raised or spending will be cut several years off in the future; for example, that the tax cuts in the 2017 Tax and Jobs Act will end in 2025. The CBO projections faithfully assume that these future tax increases and spending cuts will be enacted, but often when the date gets near, they are postponed until further into the future. 

Where Federal Debt is Headed and Staying Off the Interest Payments Treadmill

This "baseline" prediction, as it is called, suggests that higher spending will be a main driver of the future deficits. This figure shows projections for future spending and tax revenues. The burst of pandemic-related spending is clearly visible. Looking at 2025, you can see a bump upward in tax revenues when certain tax cuts from the 2107 legislation are projected to expire. But outlays just keep rising. Why? 

Where Federal Debt is Headed and Staying Off the Interest Payments Treadmill


One underappreciated factor is that at some point, a vicious circle emerges in which the interest payments on past borrowing get so big that they make annual budget deficits notably larger, which in turn drives interest payments higher, too. Here's a breakdown of the projected rise in federal spending by main categories. As you can see, spending on Social Security rises, as does spending on major health care programs. But it's net interest payments that really; indeed, the current projections are that interest payments will be larger than the Social Security program by the early 2040s.  

Where Federal Debt is Headed and Staying Off the Interest Payments Treadmill

The obvious lesson here, as anyone with a credit card has learned, is that it's important to stay away from that treadmill where debt and interest payments on the debt keep driving each other to new heights. How might that be done? 

Part of the issue here is that we have been making a slow-motion decision over time to shift the role of the federal government away from investment and away from national defense, and toward social insurance. It has been obvious for decades now since that surge of birthrates after World War II that we call the "baby boom generation" that spending programs for the elderly like Social Security and Medicare would be expanding in the 2020s. We seem to have a fairly broad social consensus in support of the spending for these programs, but we haven't been able to agree on taxes to finance them. This figures shows the projected rise in these programs over time, how much of it can be attributed to the aging of the population, and for health care programs, how much can be attribute to what seems to be an inexorable rise in health care costs. 

Where Federal Debt is Headed and Staying Off the Interest Payments Treadmill


There are a number of possible ways to stay off that interest payments treadmill via higher taxes or lower spending in other areas of the budget. But it's now 10 years since the passage of the Patient Protection and Affordable Care Act of 2010, and based on current campaign advertising by Democrats, it seems clear that it did not succeed either in holding down costs or providing an assurance of health insurance coverage. If a way could be found to hold down that excess growth in health care costs, it would be a big step in reducing the growth of federal debt and staying off the interest rate treadmill.

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  • Josh Deakin

    Reform the healthcare and social security programs.

  • Kumar Mohit

    Informative

  • Scott Finnigan

    Federal debt isn't slowing down

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

   

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