The Federal Budget's "Hidden" Surprise

By Alan R. Davis

The Federal Budget is hiding quite a surprise and it’s not going to be one that any of us will like.  The best way to see the surprise is to look up historic spending.  Look up the Net Interest Outlays for 2000 and you’ll find the number $232 billion.  That year we had an ending debt of $5.6 trillion dollars.  Now jump forward to the year 2012.  You’ll find we had Net Interest Outlays of $232 billion with an ending debt of $15.4 trillion.  Nearly three times the debt with the same level of interest?  Yes.

The Federal Reserve Board has lowered interest rates in hopes of spurring on economic growth.  The 10 Year Treasury rate averaged 6% in 2000 and only 1.8% in 2012.  But you don’t have a healthy economy maintaining artificially low interest rates over the long run.  At some point in time they will be raised to more normal levels.  What the more normal level might be is still being debated.

So if we know rates are lower than can be expected then we also know that Interest Outlays are lower than they will be, even if the National Debt would remain at its current level.  Historic trending would indicate that both short term and longer term rates will increase by 3% to 4%.  That’s if they adjust to “normal” rates rather than increasing more than that.  Then the math is pretty easy.  3% times $18 trillion equals $540 billion. 

$540 billion per year is the “hidden surprise” already built into the budget.  So when members of the DC establishment talk about a $700 billion deficit, they aren’t factoring in this hidden surprise.  The real size of the deficit problem is the current deficit plus $540 billion.  So it’s more like $1.2 to $1.3 trillion. 

So much for President Obama’s statement that he’s brought down the deficit by 50%.  Once rates increase we’ll be back to trillion dollar deficits like before.