The Riverside Press-Enterprise

Joe Biden’s undeserved victory lap on the deficit

- Veronique de Rugy is the George Gibbs Chair in Political Economy and a senior research fellow at the Mercatus Center at George Mason University.

President Joe Biden is taking victory laps for last year’s reduced budget deficit.

No one would be happier than me to see this number fall in a significan­t way.

But the decline has nothing to do with the president’s policies, and it changes little about the dangers of our fiscal situation.

According to monthly reporting by the Treasury Department, we know the budget deficit for May was $66 billion.

So far, the deficit for the 2022 fiscal year is $426 billion.

With four months left, this year’s deficit will indeed be significan­tly lower than last year’s, which was nearly $2.8 trillion.

There’s nothing like $5 trillion in Covid-19-relief spending paid for with borrowed cash to balloon a deficit!

Biden’s administra­tion did nothing to bring about the deficit’s decline.

Credit really goes to large increases in tax revenues as the economy rebounded combined with the decision by Democratic Sens. Kyrsten Sinema and Joe Manchin and their Republican colleagues to block Biden’s expensive “Build Back Better” proposal.

BBB would have made permanent many of the emergency programs created or expanded during the pandemic, and had it passed, government spending and deficits would be heading even higher than they are today.

That said, the still-too-closeto-$1 trillion deficit for FY 2022 is inexcusabl­y large. More worrisome is the cost that we taxpayers must shoulder because of the pre- and POST-COVID-19 deficits.

According to that same Treasury report, in May, the U.S. government paid $56 billion in interest payments on its debt, up from $44 billion in April.

As of now, total interest payments for this year are $311 billion.

With four months still to go on this figure, we can assume a total interest cost for FY 2022 of at least $500 billion.

This is just the beginning.

Before the pandemic and the inflation unleashed by irresponsi­ble government spending and easy money, the Congressio­nal Budget Office projected that in 2050, interest payments on U.S. debt would consume 8% of GDP and 40% of government revenue.

These projection­s assumed modest increases in interest rates over a long-term period. However, as of today, the shortterm figures look optimistic as inflation and the Federal Reserve’s response to it are boosting interest rates.

Higher interest rates today will raise interest payments shortly thereafter, as so much of our debt is short term.

According to the Treasury, total interest on marketable debt in May was 1.73%, up from 1.66% in April, and rising.

At this pace, we could reach 2% by the end of the year.

A calculatio­n by the Mercatus Center’s Jack Salmon finds that a 1% increase in interest rates would result in annual interest payments of $1.06 trillion while a 2% increase would elevate these annual payments to $1.45 trillion.

It’s expensive for sure, but it is also a vicious cycle if the interest is paid for with yet more borrowing.

More borrowing raises total interest payments. In addition, if one believes (as I do) that most of our current inflation is rooted in recent fiscal irresponsi­bility, then more borrowing to pay for more interest will only add more fuel to the inflation fire.

Finally, as the average interest rate on marketable debt approaches 2%, we are getting close to the threshold that some left-leaning economists say should trigger concerns about the size of government debt.

In 2020, economists Jason Furman and Lawrence Summers weren’t worried about this.

Interest rates were historical­ly low and seemed destined to stay low.

Still, out of academic rigor, they laid out some markers for when we might start worrying about the debt: “As a new guidepost, we propose that fiscal policy focus on supporting economic growth while preventing real debt service from being projected to rise quickly or to rise above 2% of GDP over the forthcomin­g decade.”

Today, debt held by the public is about 98% of GDP, so with a 1.734% interest rate, we are currently spending 1.7% of GDP on interest payments. If the Federal Reserve does have to raise rates significan­tly higher than projected to tame inflation, we really should start to worry.

In other words, the budget deficit might be smaller than at the height of the pandemic, and that is a good and predictabl­e thing.

But it’s no cause for celebratio­n as interest rates and servicing costs could push us into worrisome territory sooner than we think.

 ?? GEMUNU AMARASINGH­E — THE ASSOCIATED PRESS ?? President Joe Biden gestures as he boards Air Force One at Andrews Air Force Base, Md., on June 14.
GEMUNU AMARASINGH­E — THE ASSOCIATED PRESS President Joe Biden gestures as he boards Air Force One at Andrews Air Force Base, Md., on June 14.
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