Joshua Rauh on fiscal sustainability

 [[{“value”:”In 2009, 2010, and 2011 respectively, Greek government interest payments as a share of revenues were 13.4%, 14.7%, and 16.8% respectively, based on a 2012 IMF report.1 If one removes “Social Contributions” linked to government programs from the revenue measure, the ratio peaked at 24.1% in 2011. Of course, since Greece had adopted the euro it
The post Joshua Rauh on fiscal sustainability appeared first on Marginal REVOLUTION.”}]] 

In 2009, 2010, and 2011 respectively, Greek government interest payments as a share of revenues were 13.4%, 14.7%, and 16.8% respectively, based on a 2012 IMF report.1 If one removes “Social Contributions” linked to government programs from the revenue measure, the ratio peaked at 24.1% in 2011. Of course, since Greece had adopted the euro it didn’t control its own money supply, so investors might reasonably have worried about an actual hard default as opposed to a slower monetization of debt.

Where is the US federal government’s interest coverage today? Using Table 1-1 from the latest (June 2024) updates to the Budget and Economic Outlook from the Congressional Budget Office (CBO), interest expenditures as a share of federal revenues will be 18.2% this year ($892 billion of interest on $4.890 trillion of revenue) and 20.2% in 2025 ($1.016 trillion of interest on $5.038 trillion of revenue), in the absence of changes to taxes or spending.

I am more optimistic on these issues than many people I know, but still this is a matter of concern.  As for CBO projections:

As the end portion of the green dashed line in the graph shows, the CBO expects the average interest rate on the federal debt to hardly budge over the next 10 years, sitting at 3.36% and 3.38% respectively in 2025 and 2034.3

Is this assumption reasonable?

And this oopsie-doopsie:

But let’s not ask what would happen to interest coverage if the average interest rate on the federal debt were to reach its 1982 level of 9.2%, or even its 1991 level of 7.2%. Instead, let’s just consider what would happen if over the coming decade interest rates were slightly higher each year, cumulating in a 1.0% rate difference in 2034. That is, instead of ending the next 10 years exactly where we’re starting, at less than 3.4% as the CBO forecasts, what if the average interest rate the federal government paid on its debt crept up to just 4.4%?

The next graph shows that if this happens under current law, interest payments will consume 29.7% of revenues and 40.4% of revenues excluding Social Security OASDI payroll tax revenues. If you think there’s going to be appetite for accessing the Social Security payroll tax revenues for non-Social Security purposes, keep in mind that starting in 2035 the revenues from those taxes will only be able to fund 83% of the benefits.

Here is the whole essay.

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 Economics, Uncategorized