How rising US deficits affect your budget
Imagine that after a spending spree at the local shopping mall the interest charges alone on your credit cards amounted to 16 percent of your annual salary.
To make matters worse, you are not able to find a way to spend less for basic necessities, so you can't pay off the loan balance. In fact, you have to borrow more just to pay debt-servicing charges and other bills.
By now your interest expenses are growing almost three times as fast as your salary and there seems to be no way out of this financial nightmare.
Enlarge this to a national scale, and you have a good picture of the US government's debt expense predicament.
There is great debate among economists about many aspects of the federal deficit. But virtually all agree that rising government debt-service charges are a major problem that will have significant consequences for the average citizen.
The government's debt-service costs, which were $23 billion in budget year 1975, will rise to $105 billion this year and hit $178 billion in 1989, the Congressonal Budget Office says.
This problem will persist, although in a modestly reduced form, even if Congress and President Reagan take steps to lower the deficits after the 1984 election.
This year's estimated $200 billion deficit ''will not go away when the year ends or the election takes place. It will lie undigested in the stomach of the American economy forever,'' notes Herbert Stein, chairman of the Council of Economic Advisers under President Nixon. And the money the government borrows to cover the shortfall requires interest payments.
Soaring government interest costs hit the average citizen in at least three ways.
Money spent on interest payments trims the amount the government can spend on other activities. With deficits forecast as far as the fiscal eye can see, the interest tab on the mounting debt will keep rising and chew up an increasing share of the federal budget and the gross national product (GNP), the nation's total output of goods and services.
Current estimates of debt-service costs may understate the problem. CBO projections for government interest expenses assume interest rates will fall. However, assuming that interest rates remain at October 1983 levels, by 1989 the annual interest bill would increase by $31 billion over current estimates, to $ 209 billion.
''Thus, large current deficits limit future spending options,'' says CBO Director Rudolph G. Penner.
Rising interest payments also push up interest rates. Every 1 percent rise in the government debt held by the public pushes up short-term interest rates by 0. 09 percent, estimates Allan H. Meltzer, an economist at Carnegie-Mellon University. ''The approximately 25 percent increase in the stock of the privately held public debt raised short-term interest rates by more than two percentage points in the year ending June 1983,'' he told Congress last month.
Other economists say the link between public debt and interest rates is less precise. But most agree that rising interest rates make it more expensive for consumers to buy big-ticket items like cars or major appliances. As a result, employment in key industries is not as high as it might be. High interest rates also tend to discourage businesses from buying new equipment, thus slowing improvements in the efficiency of US industry.
Finally, rising federal interest payments redistribute income from the average taxpayer, whose taxes pay the interest bill, to foreign and domestic bondholders, who collect the interest payments and who often are wealthy.
''It is pretty indisputable that generally higher-income people are the ones busy investing in Treasury securities,'' says a CBO economist.
In the past, the amount of debt the government incurred in a given year fluctuated somewhat with the economy. During a recession, government tax receipts fall and additional borrowing often becomes necessary. In a recovery, tax receipts rise and borrowing needs are reduced or even eliminated if the government takes in more than it spends.
After peaking in World War II, government debt as a share of GNP declined steadily through 1974. Since then the ratio has fluctuated with the state of the economy.
But in the current recovery, continued high deficits will cause the ratio to climb instead of fall, as would normally be the case. After varying from 25 to 31 percent of GNP since 1969, government debt is slated to account for 38.6 percent of GNP in 1984 and 41.2 percent in 1986.
That does not mean the amount of debt in the economy as a whole will change radically.
''Over the last half century the total debt-to-GNP ratio has been fairly stable,'' notes Gordon Richards, a National Association of Manufacturers economist. One reason is that individuals and the government can only borrow what others decide to save. Total debt owed by all sectors of the economy was $6 .051 trillion in September, or about 1.8 times as large as GNP at that time.