AUTHOR: FiscalFutureDaily, Site Administrator
Dec 15, 2010

The Senate may actually have a final vote on the tax plan today, amid signs that the House Democrats may, very reluctantly, go along. Passing the $858 billion tax plan may help spur the economy, but it won’t help the deficit and rising national debt at all. The Congressional Budget Office reported this morning that if we stay on our current path, the government’s interest costs (the equivalent of the minimum payment on your credit card) will increase fourfold over the next ten years, to nearly $800 billion.

That’s not only nearly as much as the entire tax compromise will cost, it’s more than what the federal government now spends annually on defense, Social Security or Medicare. If we do nothing, those interest costs are going to put a squeeze on other priorities, and is just more evidence that we’re going to have to deal with our budget problems, sooner or later.

A Couple of Shots Across the Bow on the National Debt, But is Anyone Listening?

The Congressional Budget Office warned today that the government’s going to have to pay more and more just to pay for the privilege of borrowing. Interest costs – essentially the minimum payment on our national credit card – are projected to rise from $197 billion this year to nearly $800 billion in 2020:

“In CBO’s most recent projections, which assume that current laws remain the same, annual deficits decline from the $1.3 trillion recorded in 2010, but the cumulative deficit from 2011 through 2020 exceeds $6.2 trillion. Borrowing to finance that deficit–in combination with an expected rise in interest rates–would lead to a fourfold increase in net interest payments over the next 10 years, from $197 billion in 2010 to $778 billion in 2020. As a percentage of GDP, net interest outlays would more than double during that period, rising from 1.4 percent to 3.4 percent.”

The CBO’s report follows a couple of warning shots fired earlier this week by Moody’s Investor Service, the bond-rating agency, which says the tax cut deal and the higher deficits it would create could threaten the U.S. government’s triple-A bond rating:

“Unless there are offsetting measures, the package will be credit negative for the U.S. and increase the likelihood of a negative outlook on the U.S. government’s Aaa rating during the next two years.”

That would increase the government’s cost of borrowing and make it much harder us to keep financing our deficits. However, the financial markets don’t seem to think Moody’s is going to actually go ahead and do it, since, as Bloomberg reports, they’re not taking out any insurance:

“The cost of protecting bonds from default in the U.S. fell for a 10th straight trading day, the longest streak since October 2006, as the Federal Reserve kept its plan to buy $600 billion of Treasuries through June.”

In Europe, Moody’s has stopped shooting across Spain’s bow and started aiming in earnest at Spanish bonds, warning that they could trigger the same kind of credit crisis that hit Ireland and Greece earlier this year.” The fiscal circumstances in Europe are very different from the United States, but worth watching:

“Moody’s, the credit ratings agency, has said it may downgrade Spanish government bonds because of the country’s likely difficulty in raising large sums of money next year, the problems of its savings banks and the debts incurred by its autonomous regions…Spain was downgraded by Moody’s from the agency’s top rating of triple A by one notch less than three months ago because of weak economic growth, the difficulty of cutting the budget deficit and higher borrowing needs…”

The Public: A Preference for Bipartisanship?

The survey analyst Mark Blumenthal, of Huffpost Pollster, suggests the reason that surveys show widespread public support for the tax deal isn’t so much because people like the deal itself, although “most support the deal without enthusiasm”:

“All of this suggests that many are reacting favorably as much to the unusual bipartisan nature of the agreement as to the specifics of the deal itself. Multiple polls conducted since the election show that majorities of Americans want their leaders to put aside partisan differences and compromise to get things done.”

The public is following news of the tax deal more closely than any other story, according to this Pew News Index survey:

“Like the fight over health care legislation earlier this year, the debate over taxes and the economy grabbed the public’s attention more than most Washington policy discussions – largely because it affects people so directly. In questions from the same survey released separately, 47% say the agreement will help people like themselves, while 25% think it will hurt people like themselves. Nearly half (48%) also say the agreement will help the economy, while 29% say it will hurt the economy.”

One Last Round of Earmarks…

Congress says it will ban earmarks next year, but the spending bill being considered in the lame-duck session has a “one-for-the-road” feel to it, according to the Washington Post:

“The $1.2 trillion bill released Tuesday includes more than 6,000 earmarks totaling $8 billion, an amount that many lawmakers decried as an irresponsible binge following a midterm election in which many voters demanded that the government cut spending.”

Hope: Half Full, Half Empty

The Committee for a Responsible Federal Budget points out that a series of senators made speeches yesterday saying Congress has to get serious about the deficit and national debt next year:

“Combined with remarks Monday by the second-ranking Democrat in the House, you can call these developments green shoots (or maybe “black shoots” for getting our budget back in the black) for fiscal policy. “

Economist Brad DeLong says the votes on the tax plan show something different:

“A deficit hawk is somebody willing to vote against bills that increase the national debt–that do not contain within themselves provisions to recapture revenue and cut spending that lead to a reduction in the projected national debt within, say, ten years. There are at most 13 deficit hawks in today’s U.S. Senate.”

Chart of the Day

Since everybody’s talking about taxes, it’s worth going back and looking at where the government actually gets its money. And remember, when what the government takes in isn’t enough to cover its costs, it borrows the difference – and that’s what’s driving our rising national debt and long-term fiscal problem.:

 

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Fiscal Future Daily is produced by Public Agenda for Choosing Our Fiscal Future, in partnership with the National Academy of Public Administration and with support by the John D. and Catherine T. MacArthur Foundation. The editor in chief is Scott Bittle, with contributors Francie Grace, David White, Jen Vento, Hart Hooton and Tom Watson.