Wednesday, February 4, 2015

Interest Expense Will Soon Be a Bigger Expense for Government than Discretionary Defense and Nondefense Spending ... Social Security and Medicare, Along with Interest, Leave No Room for Discretionary Spending ... No Doubt About It

All Americans know that our government spends too much money in relation to its income. As a result, government debt grows continuously. President Obama says the deficits are declining. He's right about that.

What he doesn't say, however, is that the debt keeps climbing. Or that interest expenses are low because current rates are at historic lows. Or that as our national debt gets bigger each year and interest rates eventually increase, the burden of servicing government debt obligations on future taxpayers will become unmanageable, assuming there is no political will to change the currently unaffordable mandatory spending programs such as Social Security, Medicare and Medicaid, which there isn't. A Budget Hemmed In by Reality says this in relevant part:

"Under Mr. Obama’s budget, total federal spending will rise slowly over the next decade by 1.3% of GDP while the deficit stabilizes at 2.5% of GDP. By itself, the increase in mandatory spending will more than absorb the total increase. On top of that, interest on the debt will more than double as a share of GDP. So discretionary spending must be squeezed steadily—a trend that the president’s proposed 2016 increase of 0.2% of GDP for defense and an equal amount for domestic programs does little to alter."

So there you have it. Mandatory spending (primarily Social Security, Medicare and Medicaid) and interest expense on the national debt will make it virtually impossible to spend appropriately on our national defense and other discretionary programs in a few short years. Of course, by then somebody else will be in office, and President Obama's watch will be over. Unfortunately, the rest of us will pay for all this debt. Especially future taxpaying Americans.

The Legacy of Debt: Interest Costs Poised to Surpass Defense and Nondefense Discretionary Spending tells the exact same story in another way, including charts:

"The U.S. has come a long way since the days of trillion-dollar deficits, just a few years ago. The White House projects 2016 will have the smallest budget deficit in eight years. Yet the budgetary impact of the debt that’s been accumulated–$18 trillion in total, $13 trillion of that owed to the public–will reassert itself.

Currently, the government’s interest costs are around $200 billion a year, a sum that’s low due to the era of low interest rates. Forecasters at the White House and Congressional Budget Office believe interest rates will gradually rise, and when that happens, the interest costs of the U.S. government are set to soar, from just over $200 billion to nearly $800 billion a year by decade’s end.
By 2021, the government will be spending more on interest than on all national defense. according to White House forecasts. And one year later, interest costs will exceed nondefense discretionary spending–essentially every other domestic and international government program funded annually through congressional appropriations. (The largest part of the budget is, and will remain, the mandatory spending programs of Social Security, Medicare and Medicaid. Mandatory spending is over $2 trillion and is set to double to $4 trillion by 2025.)
The total dollars spent on defense and nondefense discretionary spending will continue to rise, albeit slowly, in the coming decade. But as a share of the economy, both categories of spending are poised to shrink for the next decade, squeezed down as interest rates rise. Mandatory spending will rise from 12.4% of GDP to about 14.5% of GDP over this period.

By 2025, the White House projects interest costs will be 2.8% of GDP. The CBO is somewhat less optimistic and expects it will be 3%. Most economists and budget experts would agree that interest payments at 3% of GDP are manageable for an economy. The true cost may be the squeeze to other places the government could be spending a decade from now."

Summing Up

When we want to get out of a hole, the first order of business is to stop digging. And that's especially the case going forward with the so-called mandatory spending on entitlements (mainly Social Security, Medicare and Medicaid) and debt obligations as well as interest expense on that debt.

When we borrow, we are charged interest expense which becomes an added element of the debt obligation.

In addition to paying interest expense for the duration of the loan, we are also obligated to repay the principal amount of the loan.

When interest rates rise on that debt, the cost of servicing both our existing and new debt increases, often greatly.

As is the case with individual debt, the exact same logic applies to government debt obligations as well.

The plain fact is that when we talk about lower deficits, we are simply finding another way of saying that we have added more debt.

Someday down the road, like it or not, we may be called upon to pay the piper. More likely, however, our can kicking actions today will require our kids and grandkids to pay that piper because we didn't when we had our chance.

Doesn't seem fair, does it?

That's my take.

Thanks. Bob.

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