The Corner

How Much Trouble Are We In?

We are in a lot of a trouble. The Senate Budget Committee GOP staff released a study last week that shows that balancing the primary deficit — balancing the budget minus the interest on the debt — won’t stabilize our debt problem like the president says it will. Why?

Under the proposals in the President’s budget, the total deficit would average about 5% of GDP each year from 2015-2020, and his budget would get nowhere near achieving primary balance in 2015 and thereafter. But even if Congress were to enact laws that achieved the goal the President gave to his Fiscal Commission (primary budget balance in 2015 and after), that would only slow the rate of growth in the stock of debt outstanding (compared to the growth rate of the debt under the President’s budget). To bring the growth rate of debt down to the rate of economic growth, the primary budget must be in surplus. In other words, the total deficit must be significantly smaller than a deficit that is equivalent to the level of annual net interest payments.

Talking about the payment on our debt, here are some scary facts. According to the CBO alternative scenario (which makes more realistic assumptions than the regular baseline scenario), interest rates on the ten-year are expected to increase from 3.4 percent in 2010 to 5.9 percent in 2016–2020. The average maturity is currently right around five years.

This chart shows how much of our GDP the payment of our debt will consume if the interest rate rises to the level predicted by the CBO (5.9 percent), just slightly above that (6 percent), and a full percentage point above that (7 percent):

The analysis is here.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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