When I recently broke some good news about the United States government’s finances, I pointed out that if it wasn’t for the Federal Reserve, the only news would have been bad. Instead of enjoying some refreshments of fiscal stability, the United States would be heading toward a fiscal crisis.
Now that we have reached the end of the federal government’s 2024 fiscal year, we have an even better picture of what that fiscal stability may look like going forward.
First, though, let us take inventory of what the government’s 2024 fiscal year—or budgeting year—has looked like. The U.S. government finished its 2023 fiscal year owing $33,167 billion; on September 30th this year, the total government debt had increased to $35,465 billion.
This $2.3 trillion increase in the debt is also the deficit in the federal budget for the 2024 fiscal year. (If anyone claims that the deficit is smaller than that, or to be exact $2,297 billion, they are not using the universally accepted Haig-Simons definition of income.) This is a staggering deficit, but unfortunately, it has become the norm since the 2020 pandemic.
Figure 1 illustrates how this deficit grew cumulatively throughout the fiscal year:
Figure 1
The first trillion was borrowed already in January. After that, the rise in the debt slowed somewhat in the spring, only to accelerate again in the summer. This pattern follows the legislative cycle in Congress, where there are often fights over the budget limit and squabbles over so-called continuing resolutions, i.e., bills that keep the funding of government rolling for a few more weeks or months at a time.
When summer comes, Congress tends to want to agree on funding the government through the rest of the fiscal year. In doing so, they can avoid having to interrupt their summer vacations just to pass another continuing resolution.
For those of us with a longer political memory, there was something called a ‘budget’ for the federal government. It is actually mentioned in Article I, Section 9, of the Constitution, where Congress is given the duty of passing yearly appropriations, i.e., a budget. However, over the past 15 years, Congress has been awfully creative in violating the constitution. If they really wanted to, they could pass one budget, or even a series of well-defined, separate sections that together add up to a budget.
Instead, they produce budgets more or less for show-and-tell purposes and instead use continuing resolutions to spread the formally appropriated money around. This has led to an incredible Balkanization of the budget process, where the average time horizon for which spending is considered has been shortened from years to months and even weeks.
To be blunt without being overly cynical, Congress has reduced its constitutional budgetary duty to a bargaining tool for passing other legislation.
Meanwhile, as Figure 1 shows, the deficit remains firmly entrenched in the budget. In fact, it is more than entrenched—it is a steadily growing flood wave that sooner or later will break the dam called ‘investor confidence’. Figure 2 has the bigger picture, with red areas marking deficits and the black arrow highlighting the trend of steadily growing budget deficits:
Figure 2
One reason why the budget deficit keeps growing is that the cost of the debt itself has now reached such proportions that it contributes to the erosion of the budget. In two years, the annualized interest rate on the federal debt has gone up from 1.87% to 3.25%; the cost in dollars and cents has increased from $579 billion per year in interest payments to $1,153 billion.
To put this in perspective of the federal budget, here are its largest items as estimated for 2024:
- Social Security (retirement benefits), $1,457bn;
- National Defense, $908bn;
- Medicaid (low-income health insurance), $858bn;
- Medicare (health insurance for retirees), $847bn;
- Income security (social welfare benefits), $761bn.
The cost of interest on the federal debt comes in second, sliding in between Social Security and the defense budget.
We got to this point, where we pay more in interest on the government debt than we spend on the military, because of a combination of growing debt—endless budget deficits—and higher interest rates. Fortunately, as I reported recently, the interest rate on the debt is no longer rising. It peaked at an annualized rate of 3.27% in August and has since ticked down to 3.25%.
Since the rising interest rate is responsible for approximately 80% of the rise in the debt cost (the remaining 20% being attributable to the growth in the debt), the reversal on the interest-rate side has immediate and significant effects on the cost of the debt. That cost has now plateaued, which gives Congress some much-needed breathing room to deal with the other 20% behind the growth in the debt cost.
Due to the November election, Congress will do absolutely nothing about the budget deficit until January, at the very earliest. That is when the 119th Congress is sworn in for its two-year term. But if we could dream a little bit, the first post-formalities item on their agenda would be a free-wheeling debate about how to reduce the budget deficit.
A debate solves no problems, but it would start a new conversation about the issue. That, alone, would be an achievement.
