Earlier today, I pointed out that, under the President’s 2012 budget, federal debt service payments are set to rise from 1.9 percent of federal receipts to almost 20 percent by 2021. This isn’t just a frighteningly large number – about as much as is currently spent on either defense, Medicare, or Social Security – it’s a sign that the White House has not given credence to recent reports that federal creditworthiness is sagging.
Last month, officials from credit rating agencies Moody’s and S&P again announced that the federal government’s debt could be de-rated from “AAA” status as the depth of the looming fiscal reckoning becomes ever clearer. Quoth Sarah Carlson, a Moody’s senior analyst: “”We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase.”
This is a veiled but forceful suggestion that a downgrade is more likely than ever. Though rating agencies have made similar pronouncements before to little effect, it’s uncertain how long the U.S. can continue to flaunt the credulity of creditors who still lend to the government at below-average rates. If U.S. debt were disrated, not only would continued borrowing be harder, but interest payments on our existing debt could spiral out of control.
Indeed, the budget released this morning paints an even bleaker picture than last month’s CBO report, which noted that Washington will pay about $5.5 trillion in interest on its debt over the next 10 years. That figure was revised up to $6 trillion in the budget, in part due to the fact that the budget assumes the Bush tax cuts will be extended permanently for middle-income earners (the CBO assumes they will expire as scheduled in 2012).
A shocking side note is that not only will interest payments explode over the next 10 years, but they will account for an increasing portion of the total federal deficit (which is scheduled to remain at about 3% of GDP indefinitely). For instance, by 2021, interest payments will account for 83 percent of the entire federal deficit.
Like a beleagured consumer who’s maxed out her credit cards, it won’t even be new spending keeping us in the hole by then – it’ll be the ever-rising, choking interest payments. And as Daniel Kruger and Liz Capo McCormick noted today in an excellent piece at Bloomberg.com, this would put us in the shoes of Portugal, which has been hammered by the market for allowing 69% of its deficit to be taken up by interest payments.
Not only does the new budget fail to take any measures to meaningfully trim the true drivers of the federal deficit – entitlement spending – it ignores the ever-increasing burden of payments on our existing debt. Let’s hope Congress can do better.