Buried deep in the Obama administration’s four-volume budget released this week are long-term economic projections that underscore what could be steep costs for failing to get the nation’s finances in order.
In the president’s economic analysis accompanying the budget are forecasts over the next decade for everything from inflation and growth to unemployment and interest rates on government bonds. That last one is flashing trouble ahead.
The administration offered Wednesday a rosier forecast for bond yields – what government pays to borrow – than that of the nonpartisan Congressional Budget Office. The White House sees the 10-year Treasury bond with a yield of 2 percent this year and 2.6 percent next year, about what the CBO sees.
But as the economy hits its stride, that bond yield starts climbing. It hits 4.1 percent in 2017 and 5 percent in 2021, staying there through 2013 in the administration budget. The CBO sees a rate of 5 percent in 2017 and then 5.2 percent for the next six years.
The gap between the two views might seem like an inconsequential fraction, but in reality it’s a huge difference. In either scenario, it’ll cost more to borrow to pay off past debts, but if CBO is right it’ll cost considerably more.
The 10-year bond influences the borrowing cost Americans pay for a 15-year or a 30-year mortgage. More importantly, it reflects the interest rate the government will have to pay bond buyers if it hopes to incur new debts to pay off old ones. Think of it as having the interest rate go up on your credit card and having to borrow on that card to pay off what’s already on the monthly statement.
“The administration has an incentive to assume that rates will go up later, because it keeps (borrowing) costs down,” said Roberton Williams, a veteran tax and budget expert for the centrist Tax Policy Center.
But if the CBO is correct, high borrowing costs will make it harder to deal with the U.S. debt, now above $16 trillion and projected to soar past $25 trillion in 2023. Obama’s spending blueprint envisions declining deficits that mean the debt load grows more slowly. But debt would keep growing year after year.
“Ultimately, policymakers will need to go beyond the proposals laid out in the president’s budget in order to put the debt on a clear downward path as a share of the economy over the long term and to ensure that programs like Social Security and Medicare are fully funded for the next generation,” the advocacy group Committee for a Responsible Federal Budget said Thursday in a statement urging more action.
The administration projects interest on the debt will rise from $223 billion in the current fiscal year that ends Sept. 30 to $763 billion in 2023. That’s an increase of 242 percent. The CBO forecast has interest on the debt rising to $857 billion by 2023, up about 282 percent over 10 years.
The $94 billion difference between the two projections is more than the roughly $70 billion in total budget authority Obama proposes for the entire Department of Homeland Security to cover the coming fiscal year.
Team Obama sees debt held by the public declining as a share of the economy from 78.2 percent in the coming fiscal year to 73 percent in 2023. While a slight decrease, that’s double the average of 35 percent from 1960 to 2008.
Budget watchdogs such as the liberal Center for Budget and Policy Priorities excoriated President George W. Bush for rising public debt, but now support Obama’s large debt load providing it remains on a downward path.
“It’s been, certainly, a very strange world since the financial panic, and treasuries (government bonds) have become the place for people seeking safety,” said Chad Stone, the group’s economist. “Prior to the 2008 financial crisis, what we thought we would get is that people would panic over failure to take care of the long-term debt.”
Interest rates on the 10-year bond have been at historic lows because the Federal Reserve has held its benchmark lending rate at near zero since December 2008. The Fed also has aggressively purchased long-term government bonds to drive down yields in order to force investors into riskier assets that promote economic activity and hiring.
The 10-year yield stood at 1.79 percent on the day of Obama’s budget release, near record lows. In contrast, the yield on a 10-year government bond averaged more than 5 percent every year from 1986 to 2001. Throughout the 1970s and early 1980s, this rate was above 7 percent for most of that period and in five separate years was in double digits during a sustained effort to drive inflation out of the U.S. economy.