Federal spending is out of control. However, in comparison to the spending levels that the public “wants,” federal tax receipts are likewise too low. Interest rates increase in response to rising federal deficits in an effort to draw both domestic and foreign capital. The cost of financing for investments, such as ground-breaking R&D expenditures, increases as interest rates rise.
Additionally, the most productive regions of the nation receive fewer resources when the federal government’s budget is higher. Investments are harmed. Productivity is reduced. Everyone has less wealth. Trickle-down does function. Trickle-up policies, such as increasing welfare benefits and income transfers, are a sure way to destroy the economy.
As they pass our children’s and grandchildren’s future economic tomb, Congress and the Biden administration are smiling.
An new long-term prediction of federal budget deficits was just released by the reputable Committee for a Responsible Budget. The Congressional Budget Office announced its new baseline budget projection just six months ago, but the deficit picture now appears to be significantly worse, according to the CFRB.
Lower economic growth is anticipated. Tax collections will decline. The government deficit will result in higher interest rates. The CFRB predicted that by 2032, the net government debt held by the public—both domestic and foreign—would be equal to 110% of GDP. The structural deficit will amount to 6.6% of GDP in that year, while yearly interest payments on the debt would be 3.4% of GDP, or $850 billion in current-year dollars.
Defense spending is anticipated to be little around $800 billion for the current fiscal year, which started on October 1. This puts the $850 billion figure in context. Spending is being restricted by interest expenses, preserving the United States’ status as a sovereign democratic nation.
The CFRB is, in my opinion, significantly overly optimistic about the deficit, which is the most alarming point.
By boosting interest rates, the Federal Reserve is attempting to combat inflation. The cost of borrowing for the federal government rises as the Fed raises interest rates. Currently, the federal funds rate is between 3.75% and 4%. The Federal Reserve Board of Governors is emphatically indicating that the federal funds rate will rise significantly from its current levels. Gov. James Bullard of the St. Louis Federal Reserve warned of the possibility of a 6-7% federal funds interest rate last week. The net deficit today is getting close to being 100% of GDP. $250 billion is added to borrowing expenses for every 1% increase. A 6% federal funds rate would result in an additional 2% of GDP in borrowing expenses for the federal government, or up to $500 billion annually.
Fed Chairman Jerome Powell has pledged slower growth in order to reduce inflation, which only serves to worsen the situation with regard to the deficit. Numerous economists agree that a slight recession is required, including Democrat Larry Summers. Economic stabilizers kick in during a recession when tax revenues are lower and automatic federal government expenditure is higher. Increased deficit expenditure The federal deficit increased significantly from the structural deficit of 2009, which was about 3% of GDP, to the federal deficit of nearly 9% of GDP during the Great Recession.
Equity markets anticipate a modest recession starting in 2023. Powell, the chairman of the Federal Reserve, is correct; there will be serious economic hardship. The government and Congress are both mute about the impending deficit disaster. In actuality, Democrats want to increase welfare spending while Republicans want to cut taxes.
While they dig the financial graves of our children and grandchildren, who will inherit $35 trillion in federal debt, political officials from both parties are smiling.