Let’s talk Deficits, Debt, and Debt Service.
So, quickly… a deficit arises when there is not enough capital to cover the cost of a purchase. There are different ways to deal with the deficit created in this instance, one being the accumulation of debt, via a loan, to cover the shortfall. The payback of the loan involves not only the payment of the original principal but the interest, as well, which is basically the cost of the money over time.
Governments get operating capital by collecting taxes. Monies collected by governments are for the purpose of funding government’s responsibility to the people it governs. Unfortunately, many governments have lost the art of budgeting tax revenue and, no matter how high the taxes are raised to bring in capital, there are always more expenditures politicians want that exceed revenue.
A federal balanced budget refers to a condition where the taxes collected cover the expenditures of government. The, not so dirty (any more) little secret is that the US has not had a balanced budget in a very, very long time. Now, there is a lie that is propagated that Bill Clinton delivered two budget surpluses but I will point you to – Living Off Debt – Nice Work If You Can Get It – Change My Mind! (change-my-mind.net) – to explode that myth and will not take the time to do it here again.
When tax revenue does not cover budget expenditures, a deficit is created. When money is borrowed to cover the shortfall, debt is created. The typical way to deal with debt is to establish a payback schedule, like your mortgage or a car loan, if you have one. Unfortunately, since any idea of living under a balanced budget was pronounced DOA back in the fifties, I have never heard any real talk about reducing our debt. What we have heard are promises to reduce the deficit – in other words, instead of any talk about paying down the debt all we hear are promises about reducing the amount we need to borrow each year. How do you think that’s worked out? Paying the debt is now out of the picture, especially when we can’t even live without massive borrowing to fund our operating budget.
Now, some debt is unavoidable, for instance, debt accumulated during war. But we’re way past that now and there doesn’t appear to be even the whisper of a possibility that we think we will pay the debt down.
I’ve often wondered how our politicians think it’s prudent to borrow money, using the taxpayers as collateral, and then give it away, not only here but overseas, as well. The Biden admin wants to spend $86 million to build a housing of sorts to house illegal immigrants. It is currently costing the taxpayer $800 per day to house illegal immigrants at the border before they are released into the US and the facilities are filled with 2, 3, 4, 5, 6 times the amount of people for which they were meant. One facility has no running water and we are now hearing news of COVID outbreaks. That said, I believe we are even giving illegal immigrants COVID stimulus relief checks.
Okay, before I wade too deep into the weeds… The Congress passes a budget, when they can agree, which hasn’t been for quite a while so we’re actually passing bills for partial funding a couple times a year. The point is, they’re not based on revenue available, the bills are funded by borrowing, otherwise known as deficit spending. All this adds to the National Debt which continues to balloon. Back in 2000, prior to Bush 43, we stood at $5 trillion in debt. Bush doubled it, and then Obama doubled what Bush gave him, getting us to $20 trillion, and then Trump, with all the COVID spending got us to near $30 trillion and Joe is waving goodbye to $30 trillion of national debt in the rear-view mirror.
Now we get to the meat, debt service. Debt service is part of the annual budget, it’s the interest on the National Debt. Hold onto your pants… the debt service, or interest if you prefer, on 30 trillion dollars is 150 billion dollars a year at 0.5% – a half-percent. If the interest rose, which it inevitably will, the debt service will become a crushing weight to the economy and American families. Now, ignoring the fact that we are adding nearly a trillion dollars a year, that is in a normal, non-COVID pandemic year, to the debt, consider that if the interest rate rose to 3%, the yearly debt service on 30 trillion dollars would be 900 billion dollars, just shy of a trillion dollars.
Forgetting about paying the debt, just the debt service is going to crush us. Raise taxes to wherever you choose, before any money is directed towards any particular budget line item the debt service payment comes right off the top. If $3.42 trillion, or so, was a healthy tax revenue amount (2020 tax receipts), nearly one-third of that would have to go to the debt service (at 3%) making it necessary to… yep, you guessed it, borrow more money.
Okay, some real numbers… While I cannot vouch for the drop-dead accuracy of these numbers, they are close enough to make the point. The 2020 federal budget was $4.79 trillion, pre-COVID spending, and tax revenue came in at $3.42 trillion. That created a shortfall of about $1.25 trillion prior to all the money printed for COVID relief and foreign country give-aways.
The federal budget consists of mandatory spending, discretionary spending and interest on the total national debt.
Mandatory Spending: government-funded programs such as Medicare, Medicaid and Social Security.
Discretionary Spending: defense-related departments, such as military spending and Veteran’s Affairs. This also includes spending for the Department of Defense and Homeland Security.
Debt Interest: already discussed.
There’s no sense discussing here the fact that the US spends more than the total of what the next ten highest spending countries spend on national defense, that’s a topic for another time and not germane to my point. So, moving right along…
Interest payments on the national debt are the fourth largest budget item in the fiscal budget. Now this is interesting but – the intragovernmental debt is not used to calculate interest payments since this is really money the government owes itself, i.e., money borrowed from Social Security and discussed in a previous discussion: https://change-my-mind.net/2021/01/07/living-off-debt-nice-work-if-you-can-get-it/
So, I’m actually finding out that the overall average of the interest on the National Debt is more like 1.4% – the interest rate is not uniform across the board because treasury notes are part of the debt and they would have to pay higher interest than the Fed rate or no one would buy them. So, on 30 trillion dollars, we are looking at 420 billion dollars of interest. If the interest rates increase, well…
The only way to continue to service the debt in the face of rising interest rates, inflationary pressures, and more debt, is to raise taxes. Every time the taxes are raised, working families lose wages. So, who will service the debt as it continues to grow? Your grandchildren and beyond. Seems immoral for us to live our profligate life-style off of them, doesn’t it?
2 thoughts on “Deficits, Debt, and Debt Service.”
This blog was… how do you say it? Relevant!! Finally I have found something which helped me. Cheers!