Recently, the Treasury Department reported a 26% increase in the federal budget deficit with a 2019 deficit of $984 billion. The reported data on the budget can be misleading. You might think that a budget deficit is the amount of spending that exceeds budget revenue, in other words, the amount of borrowing needed to make up for this shortfall. However, in the world of Washington D.C., not all spending is counted as spending and it’s possible for the government to borrow money from itself. Let’s look at the actual Treasury Department budget numbers.
The Treasury reports the Total Public Debt Outstanding of almost $23 trillion, which is the sum of the Intragovernmental Holdings and the Debt Held by the Public.
There is roughly $6 trillion of Intragovernmental Holdings. This is money that the federal government says that it owes to itself. Over the years, the government has earmarked tax revenues for one use, say Social Security spending, and spent those revenues on some other category of spending. So now they owe themselves this money. However, this is not truly debt. No business or household is concerned about being in debt to itself. If you promise to spend $100 of your income on a car payment and instead you buy $100 of food, you don’t pretend that you owe yourself $100. However, in the feds’ budget this is called Intragovernmental Holdings. When looking at the debt numbers we should ignore these Intragovernmental Holdings.
That leaves us with the Debt Held by the Public, what I consider to be the true amount of federal government debt.
In your personal life, if you earn $100, you spend $120, and you borrow $20 to cover this shortfall, then your personal deficit is $20. Similarly, if the feds have $100 billion of revenue and spend $120 billion, then they must borrow $20 to cover this spending. That $20 increase in their debt is the deficit. So the true deficit is the change in the Debt Held by the Public.
Here is the Treasury Department data for the Debt Held by the Public since 2001.
The Congressional Budget Office has reported that the 2019 deficit is the highest that it’s been in seven years. As you can see from the numbers above, that report is not quite accurate. The deficit peaked at over $1.7 trillion in 2009 and while the deficit is distressingly high, the 2018 and 2016 deficits were slightly higher. The deficits of this century under the Bush II, Obama, and Trump administrations should concern all of us. The government’s debt has increased 400% in 18 years. And we’re projected to have trillion dollars plus deficits for the foreseeable future.
How much interest does the government pay on their debt? Since the government owes is in debt to itself, it pays itself interest. We should ignore these intragovernmental interest payments for the same reason we should ignore the intragovernmental debt.
Fortunately, the Daily Treasury Statements provide us with the Interest on Treasury Securities. This is the actual amount of withdrawals from government accounts for interest payments, so this number ignores intragovernmental interest payments. Here are the numbers.
From FY 2001 to 2019, interest payments increased 88% from $162.5 billion to $305.7 billion. As I previously stated, during that same time, Debt Held by the Public increased 400%. For the last several years, the feds have taken advantage of artificially low interest rates. If interest payments had increased at the same rate as the level of debt, the 2019 interest payments would be $818 billion. For comparison sake, payments for Security Benefits in FY 2019 were $921 billion. As the government continues to pile up trillion dollar deficits, when interest rates return to a historical norm, interest payments may exceed payments to Social Security recipients. With the coming budget deficits, it’s possible that interest payments could surpass a trillion dollars annually in the next decade.
Generally, the political class appears to be unconcerned about the budget deficits. Those who are troubled about budget issues are generally concerned that the deficits will out of control in a couple of decades. The 2019 Congressional Budget Office Long Term Budget Outlook report states that the 2019 federal debt held by the public equals “78 percent of gross domestic product (GDP) — its highest level since shortly after World War II. If current laws generally remained unchanged, growing budget deficits would boost federal debt drastically over the next 30 years, the Congressional Budget Office projects. Debt would reach 92 percent of GDP by the end of the next decade and 144 percent by 2049.”
Don’t be fooled. A budget crisis could occur much earlier than 2049 because of the level of borrowing needed to fund the deficit and its debt payments. It’s reported that the federal government spent about $4.75 trillion last year . This ignores the government’s debt payments. According to the Treasury Department, total spending in FY 2019 was nearly $16 trillion. (In the Daily Treasury Statements, this is calls Total Withdrawals.) By reporting spending to be $4.75 trillion, the feds are hiding most of their spending from us.
The federal government is borrowing a tremendous amount of money to make its payments on its Debt Held by the Public. The final Daily Treasury Statement of 2019 tells the story. In the past fiscal year, they borrowed $11.9 trillion (called Public Debt Cash Issues) and made debt payments of $11 trillion (called Public Debt Cash Redemptions). If we include all borrowing and debt payments to be part of the federal budget, then the $11.9 trillion of borrowing constituted 74.5% of federal spending and debt payments were 68.5% of federal spending. Debt payments in 2019 were over twice as much as all other combined spending.
Here is the historical data for the Public Debt Cash Issues and the Public Debt Cash Redemptions.
Note the skyrocketing amount of borrowing in the past 19 years. Since 2001, Public Debt Cash Issues (total borrowing) increased 375% and Public Debt Cash Redemptions (debt payments) increased 311%.
The danger here is that lenders at some point may not be willing to loan our government these trillions of dollars a year. In the last 18 years, Public Debt Cash Issues increased at an average rate of almost 9% per year. This is not sustainable. If the federal government continues to increase its borrowing at 9% annually, in 2030, the feds will need to borrow over $28 trillion to cover their spending on the deficit and debt payments. The moment lenders become unwilling to fund this budget recklessness, the government’s financial houses of cards will collapse.
Dr. Mark Brandly is a Fellow of the Mises Institute. He holds a PhD in economics from Auburn University, where he was a Mises Research Fellow, specializing in the areas of Public Finance, International Economics, Natural Resource Economics, and Industrial Organization. He has published articles in The Wall Street Journal, The Journal of Commerce, Public Finance Review, The Quarterly Journal of Austrian Economics, The Free Market, various newspapers and websites. Since 2003, Dr. Brandly has taught at Ferris State University. He also taught at Ball State University and Taylor University. Prior to his academic career, he worked in the Colorado oil and gas industry managing the drilling, completion, and production of oil and gas wells.
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