Interest Costs on the National Debt Are Soaring

Senate Majority Leader Chuck Schumer
Reuters
By Yuval Rosenberg

Welcome to what promises to be a jam-packed news week.

Tomorrow morning will bring an inflation report for November along with a House hearing on the collapse of cryptocurrency exchange FTX featuring testimony by former CEO Sam Bankman-Fried. And the Department of Energy plans to announce what has been called a major milestone in fusion research.

On Wednesday, the Federal Reserve is expected to again hike its benchmark interest rate, though this time by a more modest 0.5 percentage points, signaling a shift after four straight 0.75-percentage-point increases. Fed Chair Jerome Powell is slated to hold a news conference that could provide further indications about the central bank’s outlook.

And, of course, Congress faces a Friday deadline to extend federal funding and avoid a partial government shutdown.

Here's what we’re watching:

Congress Scrambles for a Spending Deal

Government funding expires Friday and appropriators working toward a full-year spending bill reportedly remain billions of dollars apart on non-defense spending for 2023.

The two sides have agreed to about $858 billion in defense spending, a boost of roughly 10% over 2022 levels. And negotiators have apparently made some progress toward an omnibus spending package — enough, at least, for Democrats to hold off on plans to unveil their own version of the legislation and a fallback full-year stopgap funding measure.

Extending the deadline: Still, with little to no chance of having the full-year spending package done in time, Senate Majority Leader Chuck Schumer (D-NY) said Monday that Senators should be prepared to vote this week on a one-week funding extension, known as a continuing resolution, to keep the government open and buy negotiators more time. That stopgap has been widely expected.

“Both sides are moving forward in good faith to make a deal, even if it’s not going to be everything both sides want,” Schumer said, adding that neither side wants a shutdown.

Some Republicans have urged their party to hold off on a full-year funding package and press for a longer stopgap that extends into the new year, when they will control the House. “As much as I hate the dysfunction a Continuing Resolution represents, a massive Omnibus would be worse,” Sen. Ron Johnson (R-WI) tweeted on Friday. “Let’s pass a CR that will allow a Republican House to pass a more fiscally responsible spending bill early next year.”

A full-year CR reportedly also remains a fallback option. The Biden administration has also submitted a list of "anomalies", or funding adjustments to provide more for homeland security and other programs above what the CR might otherwise provide. And while the Pentagon and member of both parties have warned against a full-year CR, such a package could now include “a twist that could make it more palatable” to lawmakers, as Roll Call described it: The legislation “would contain lawmakers' earmarks secured in earlier versions of the fiscal 2023 appropriations bills.”

Child tax credit and business breaks still up in the air: Lawmakers are looking at attaching a variety of other legislation to the year-end spending bill, including the renewal of an expanded Child Tax Credit and a host of business tax breaks. The White House has reportedly indicated that it would support a compromise deal to revive the expanded Child Tax Credit that expired at the end of last year — even if that deal included work requirements that it had previously opposed, Politico’s Adam Cancryn reports. “With time running out to resuscitate the program before Republicans take over the House, White House officials have urged lawmakers in recent weeks to pursue any deal they can get,” Cancryn writes.

Democrats are pushing for the tax credit as part of a deal that would also include business tax breaks that Republicans want. But with time running short and the spending topline still unsettled, the prospects for such a deal may be fading.

“Barring a last-minute breakthrough,” The Wall Street Journal’s Richard Rubin says, “many businesses will face higher taxes because of changes to how they can deduct research costs and interest expenses. For families, the child tax credit would remain at its current levels, without reinstating temporary expansions that Democrats implemented in 2021.”

Interest Costs on National Debt Jump at Start of Fiscal Year

As interest rates continue to rise, the federal government is spending more to service the national debt, the Treasury Department said Monday. According to the latest monthly Treasury statement, the U.S. made $103 billion in gross interest payments on the debt in the first two months of the 2023 fiscal year, which began in October — an 87% increase from the $55 billion it spent in the same period a year earlier.

“It’s a taste of what lies ahead after the Federal Reserve hiked its benchmark rate by almost 4 percentage points this year and is expected to lift it close to 5% in 2023,” says Bloomberg’s Christopher Condon.

The same Treasury report shows that the monthly budget deficit in November was $249 billion — a 30% increase from the $191 billion budget gap a year before, and a record for the month. Receipts fell by $29 billion to $252 billion relative to a year ago, and outlays rose by $28 billion to $501 billion. Adjusting for calendar-related factors, such as the timing of holidays and weekends, the deficit would have been just 20% larger.

The decrease in revenues was driven in part by a big increase in tax refunds paid to individuals as the IRS continues to work its way through a backlog of tax returns. Earnings paid to the Treasury by the Federal Reserve also saw a sharp decline, falling by 98%.

Higher outlays were related to an 18% increase in Medicare costs relative to a year ago, and a 94% increase in education costs associated with changes in student loan forgiveness programs.

The bottom line: The huge reductions in the budget deficit seen earlier in 2022, driven by the expiration of temporary aid programs related to the Covid-19 pandemic, are unlikely to be repeated. At the same time, higher interest rates will mean higher payments on the existing debt, putting upward pressure on the budget deficit in the months ahead.

Quotes of the Day

“I believe by the end of next year you will see much lower inflation if there's not an unanticipated shock.”

− Treasury Secretary Janet Yellen, in an interview with CBS’s “60 Minutes” that aired Sunday. A New York Federal Reserve survey released Monday showed that consumers also anticipate inflation will cool, with expectations for price increases over the coming year running 5.2%, the lowest since August 2021.

“Getting inflation down to 3% or 4% should not be all that hard. Getting close to 2% in the next couple years will be much harder and may not even be doable.”

− Ethan Harris, head of global economics research at Bank of America, quoted in a Wall Street Journal article Monday about the debate at the Federal Reserve over interest rate policy.

Number of the Day: 76

The Congressional Budget Office recently released a new report outlining 76 ways that the federal government could reduce spending and increase revenues over the next 10 years. The two-volume effort focuses on potential savings large and small, and includes proposals such as limiting the growth of Medicaid spending to the rate of inflation (providing an estimated $836 billion in savings from 2023 to 2032) to raising federal income tax rates by 1% (producing about $1 trillion in new revenue).

“To put the federal budget on a sustainable long-term path, lawmakers would need to make significant policy changes—taking actions to cause revenues to rise more than they would under current law, reducing spending to amounts below those currently projected, or adopting some combination of those approaches,” CBO Director Phillip L. Swagel said in a statement. “The nation has time to implement such changes, and these volumes indicate the potential magnitude of effects from a broad range of actions.”

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