The threat of rising federal deficits has a silver lining: low interest rates.
Those low rates, which make Treasury debt less costly, mean Congress has more time to address the nation’s fiscal challenges, the head of the Congressional Budget Office told lawmakers Wednesday.
“When interest rates are low, as they are today, the cost of not acting is pretty modest,” CBO Director Phillip Swagel told the House Budget Committee at a hearing on his agency’s new budget and economic forecast.
The agency’s updated outlook projects a $1 trillion deficit this fiscal year, and at least that much every year for the next decade, averaging nearly 5 percent of total U.S. economic output. By contrast, deficits have averaged just 3 percent of gross domestic product dating back to 1970, according to agency figures. Debt held by the public, which excludes special Treasury securities held by government trust funds, is projected to equal nearly the entire U.S. economy within a decade.
However, Swagel indicated a debt crisis isn’t forthcoming, at least in the near term.
“There’s a problem that’s decades in the making and decades in the solving,” Swagel said in comments that seemed aimed at encouraging long-term fiscal planning more than immediate budget slashing or tax raising.
“I worry about a crisis, again not today, not even within our 10 years,” he said. “But over the oncoming decades, there could be slower-moving economic impacts if interest rates move up some — not a crisis, but some — inflation moves up, the fiscal space … diminishes, that would have a slower-moving but certainly negative impact on the nation as well.”
In its new forecast, the CBO projects slowing economic growth and rising interest rates over the coming decade, though Treasury yields would remain low relative to historical norms.
The economy would grow by 2.2 percent this year, down slightly from a projected 2.4 percent in 2019. While that’s slightly faster growth in both years than the CBO predicted last August, over the coming decade growth rates would dip below 2 percent. And the numbers are well below the 3 percent target the Trump administration laid out in its budget proposal last year.
Interest rates will keep a lid on deficits and debt in the near term, the CBO said. The average yield on the benchmark 10-year Treasury note is forecast to average 1.9 percent this year before rising gradually to 3 percent by the end of the decade. That contrasts with a historical average of roughly 7 percent from the 1960s through 2007, before the onset of the Great Recession and unconventional monetary policy tools employed by the Federal Reserve that helped send interest rates tumbling.
Nonetheless, lawmakers said the CBO’s latest forecast, which was largely in line with previous projections, confirmed what they already knew: Deficits must be tamed to avoid soaring interest costs that sap funding for needed programs. Net interest payments on the debt are projected to more than double in the coming decade, growing from $382 billion this fiscal year to $819 billion in fiscal 2030.
But there was no agreement on a course correction. Democrats heaped scorn on the Republican tax cuts of 2017, which the CBO has said would increase deficits by $1.9 trillion over a decade, including interest.
“Despite the economic expansion he inherited, the fiscal outlook has worsened since President [Donald] Trump took office,” said House Budget Chairman John Yarmuth, D-Ky. “The reality is that President Trump and Republicans drove up deficits instead to gift the wealthy and corporations with a $1.9 trillion tax cut.”
Republicans countered that most of the blame for rising deficits lies with the soaring costs of entitlement programs like Social Security, Medicare and Medicaid. “That’s what’s squeezing all of the opportunities of this Congress to fund the national priorities, to include national security,” said Rep. Steve Womack of Arkansas, the committee’s ranking Republican.
Womack and other Republicans also faulted the Democrat-led committee for not passing a budget resolution to guide tax and spending decisions this fiscal year. They said they saw no interest in passing one for the coming fiscal year either, and Yarmuth has previously suggested there may not be one.
“We did pass a budget last year,” Yarmuth said Wednesday, referring to a two-year budget deal passed last summer that raised discretionary spending limits. Even if Congress had passed an annual budget resolution, he asked, “how would the world be different if we had?”