Debt risks lurk inside fed budget
WASHINGTON — 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 on 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 foresees.
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 predicts 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 more than $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.
“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 on Thursday.
The administration projects interest on the debt will rise from $223 billion in the 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.
Obama predicts debt held by the public would decline 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 debt, but support Obama's providing it remains on a downward path.
“It's been, certainly, a very strange world since the financial panic, and (government bonds) have become the place for people seeking safety,” said Chad Stone, the group's economist.