Fiscal Responsibility Act no more than a speed bump
The Fiscal Responsibility Act resolved the debt ceiling standoff and ended a short-term crisis — but it sets up a momentous challenge for whoever is elected president in 2024. The act suspends the ceiling until Jan. 2, 2025, at which time the new ceiling becomes whatever is the then-outstanding amount of national debt.
That means we will hit the new ceiling on the very day it is established, and the president-elect will start his term in the middle of a new debt crisis.
The only upside of the new law is that it will probably set the terms of debate in the 2024 presidential and congressional elections. It will force the presidential candidates to address what they will do on Inauguration Day in 2025, when the nation will be 18 days into a new suspension of borrowing.
The new ceiling is likely to be about $35.4 trillion, after a staggering $4 trillion of borrowing on top of the old debt ceiling of $31.4 trillion. The likely federal deficit — and borrowing — for this fiscal year ending September 30 is about $2 trillion, after having reached a $1.1 trillion deficit at mid-year, according to the March Monthly Treasury Statement.
We had borrowed $535 billion this fiscal year before hitting the old ceiling in January, leaving $1.5 trillion yet to be borrowed by fiscal yearend. Add to that another $2.5 trillion of debt over the following 15 months through December 2024, and we’re at $35.4 trillion. We are already well on the way, having borrowed [$575] billion in just the two weeks since enactment of the FRA. While the Congressional Budget Office projects just a $1.5 trillion deficit this year, it has not adjusted for weak April tax receipts that were “$275 billion less than the CBO anticipated,” nor has it adjusted for significantly higher interest on the national debt. See below.
As for the Fiscal Responsibility Act, it barely amounts to a speed bump in face of that torrid pace of deficit spending and borrowing. The CBO has scored the FRA as saving only $150 billion annually over a decade. That’s baby steps, even if in the right direction.
Further cuts may emerge either from the reimposition of the regular appropriation process that the FRA mandates or from the penalty of a 1% across-the-board cut in all discretionary spending absent regular process. Even if the penalty works, significant cuts are unlikely, since the 1% penalty serves to set a 1% maximum amount for cuts.
The FRA does freeze deficit spending, but it doesn’t reduce it in any material way. Not after President Biden and the Democrats fought to protect their wild deficit spending. Apparently, they don’t realize that deficit spending on the scale currently prevailing
will lead to the elimination of their progressive programs. Interest on the national debt will squeeze them out.
Net interest on the national debt is the fastest growing item in the federal budget. Soon, it will be the largest item, surpassing Social Security.
In fiscal 2021, net interest was $352 billion; in fiscal 2022, $475 billion. In fiscal 2023, it has already reached an annualized pace of $680 billion over the last three months, per Monthly Treasury Statements. Net interest is not even close to its near-term peak.
Most of the Federal Reserve’s interest rate hikes have been in effect for less than a year. The embedded interest on the $24.6 trillion of publicly held debt outstanding before FRA ($31.4 trillion less $6.8 trillion in government trust accounts) was about 2.8 percent ($680 billion divided by $24.6 trillion). That is far below current interest rates of 5.25 percent on short-term Treasury bills and about 3.8 percent on long-term Treasury bonds.
After $4 trillion of additional borrowing, publicly held debt will rise to about $28.6. If the embedded interest rate on that $28.6 trillion of debt has risen to just 3.5 percent, the annualized interest cost will be about $1.0 trillion. The CBO, in contrast, projects an average embedded interest rate of only 2.9% and only $745 billion of interest cost for fiscal 2024.
The increased interest cost of $745 billion to $1 trillion will have to be taken from other spending categories every year, or the new debt ceiling will have to be raised by yet another enormous amount. Thus, the debate in the autumn of 2024.
Speaker McCarthy is to be commended for steering the passage of FRA, including engineering its passage overwhelmingly on Democrat votes. This positions Democrats, rightly, as supporting only baby steps in restraining their runaway deficit spending that is fueling massive increases in debt, skyrocketing interest costs and corrosive inflation.
So now Republicans have an opportunity to lead a great national debate about the nation’s unsustainable fiscal path and convince the nation to take the giant steps that are needed.
This column appeared originally in The New York Sun.
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