Slow-motion train wrecks
The silver lining, if there is one, in a proverbial slow motion train wreck is that the engineer may be able to recognize the disaster in its midst if it is unfolding so slowly, and then, do something to keep the train on the rails and apply the brake and prevent a total calamity.
At the national level, deficit spending is producing mountainous debt, skyrocketing interest cost and corrosive inflation. In Connecticut, plummeting tax revenue, a declining labor force and outmigration spell a return of the permanent fiscal crisis that Governor Lamont has claimed to have ended.
So, here’s a bulletin for national and state engineers concerning these slow-motion rail debacles.
Over the last three weeks, the national debt grew dramatically. Interest costs have soared, both on the new debt and as existing debt has been refinanced at higher rates. Since enactment of the legislation which ended the debt ceiling crisis, the U.S. Treasury Department has borrowed and increased outstanding debt by $802 billion, according to the latest Daily Treasury Statement. The new debt has been mostly short-term Treasury bills issued at rates of about 5.25%. That has taken the national debt to $32.2 trillion and added more than $40 billion on top of the prior running rate of almost $700 billion of annual interest cost.
Just this week, the Treasury conducted its normal biweekly auction of long-term Treasury notes and bonds. Treasury sold $142 billion of notes to replace the same amount that were maturing. On a weighted average basis, the maturing notes were four-year notes with a 1.00% interest rate, and the new notes are four-year notes with a 4.25% interest rate. The 3.25% differential will add $4.6 billion to annual interest costs over each of the next four years, bringing the running rate of annual interest to $745 billion.
For context, less than four years ago at the end of fiscal 2019, the national debt was $22.7 trillion. Net interest in fiscal 2019 was $376 billion. So, since then, debt has increased more than 40% and interest cost has doubled.
With the Federal Reserve normalizing interest rates after the near-zero rates of the post financial crisis and the COVID eras, both debt and, especially, interest costs are increasing at an accelerating rate. Borrowing to pay interest begets more debt and more interest costs, which necessitate more borrowing with more interest cost, and so on; at the current scale of deficit spending and annual interest expense, this dynamic represents at least the beginning of a vicious cycle from which escape becomes increasingly difficult, if not impossible. An inescapable cycle is what’s called a doom loop.
In Connecticut, revenue is still declining in two key tax categories, so-called Estimates and Finals and the Pass-through Entity Tax. Less than two months ago, OPM and OFA, the state’s official budget masters, reduced their projection of future gross tax receipts in these two large categories of taxes by $2 billion over four years, including by $500 million for the fiscal year concluding this week. They did not change their forecast of tax refunds, despite that falling tax revenue usually manifests itself in mounting refund claims as well as in reduced tax payments. They left unchanged their forecast that tax refunds of all types this year were falling – not rising – by $125 million from last fiscal year. This week OFA updated its estimates for this fiscal year, but barely changed its estimate of tax refunds despite that the Department of Revenue reported last week that actual refunds of all tax types for the first eleven months of this fiscal year were equal to refunds for all 12 months of the prior fiscal year. DRS reported that refunds in the two key tax categories were up $200 million from the prior fiscal year.
In this week’s update OFA reduced its estimate of expected gross receipts in the two key tax categories by $50 million. Combining this reduction in gross receipts with the $200 million increase in tax refunds translates into a $250 million decline in net receipts. That brings the year-to-date reduction in estimated net receipts to $750 million in these two categories. That’s a big change from just two months ago – a change in the wrong direction. Also going in the wrong direction are Connecticut’s labor market trends. The state’s labor force has been shrinking for a year: from 1.943 million in May 2022 to 1.905 million in March 2023, 1.901 million in April 2023 and 1.897 million in May 2023. Demographics, which had improved during COVID, have deteriorated again, with net domestic out-migration of 13,500 between July 2021 and July 2022 versus in-migration of 19,000 between July 2020 and July 2021.
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