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Federal Government Debt Undermines the Programs It Finances

Wednesday January 23rd, 2013   •   Posted by Randall Holcombe at 9:08am PST   •  

Just looking at the rate at which the federal government’s debt is growing is unnerving. If you’re brave, you can look here. The table shows federal debt on September 30 of each year, the end of the federal government’s fiscal year. The numbers almost speak for themselves.

About 37.6% of that debt was accumulated during the last four years, from 2008 through 2012. Those years saw the federal debt grow by more than $6 trillion; quite amazing when you consider the federal debt was a bit under $5.7 trillion in 2000. The federal government’s debt has increased more under President Obama’s first four years than it did in the nation’s first 224 years.

The 12 Bush-Obama years account for about two-thirds of the federal debt. Under President Bush the federal debt increased by $4.4 trillion, and then another $6 trillion under President Obama.

One reason the federal debt presents a problem in the future is that interest must be paid on it. Today, with interest rates at historic lows, interest on the federal is still about 6% of federal spending. But that will go up when interest rates rise, and will go up because the federal debt will continue to increase.

The interest rate the federal government pays on its debt averages 2.2% in today’s low-interest environment, but it is not difficult to imagine that rate doubling to 4.4% or tripling to 6.6%, in which case the interest on today’s debt would go to 12% or 18% of the federal budget, ignoring any impact of future deficits.

As the president and Congress look at threats to entitlement programs, the biggest threat is the current budget deficit.

Those entitlement programs (mainly Social Security, Medicare, Medicaid) are the largest share of federal spending, so those programs, as they presently exist, are the biggest threat to their own continuing existence. What’s worse, with Obamacare, our government has promised us even more.

Look at the federal debt numbers above. This is not sustainable. That is the essential truth behind the politically unpopular idea that the programs must be reformed in order to save them. I am not saying the programs should be saved. I am saying their current profligacy dooms them.

Federal expenditures were $1.8 trillion in 2000, and $3.8 trillion in 2012. The huge deficits that financed that spending growth guarantee that in the future, rising federal interest payments will crowd out federal spending on everything else.

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January 2013