The Biden administration will have greater scope to spend on programs even despite the recent spike in federal debt, a top campaign economist said, because of falling interest rates.
“The next president will have high levels of overall debt but low debt service levels, which will grant the administration more space to execute their agenda,” said Jared Bernstein, one of Joe Biden’s top economic advisers.
Congressional Budget Office projections from last week show that the federal government has locked in lower interest rates to pay off its debt in the long run. Net interest costs on the federal debt have declined 12% in the first 10 months of the fiscal year.
The lower interest rates would give a Biden administration more leeway to spend hundreds of billions on his education or infrastructure agenda, for example, with less concern about the ramifications of overspending.
In other words, the cost of the debt has fallen, even as the debt has shot up. Federal debt has increased $3.3 trillion so far this fiscal year, more than triple the shortfall recorded in fiscal year 2019, due to coronavirus relief spending, but the government’s ability to pay off this debt has been made easier thanks to historically low Treasury interest rates. Interest rates have fallen worldwide because of a weak economy. Yields on 10-year Treasury securities, for instance, fell from above 1.6% before the pandemic to record lows of close to 0.3% in the spring, before rebounding to around 0.7% in recent days. Furthermore, the budget office projects interest rates will stay below historical levels for more than a decade to come.
Therefore, even though the debt-to-GDP ratio is high, the interest payment-to-GDP ratio is significantly beneath its peak levels from the late 1980s and early 1990s, when the interest reached over 3% of GDP. The net interest on federal debt is currently at 1.6% of GDP and will continue decreasing to a low of 1.1% in 2025 and then increase thereafter, reaching 2.2% of GDP in 2030, according to the budget office’s latest projections.
“Low interest rates indicate that a growing debt is not overheating the economy or crowding out private sector investment that could raise future productivity and incomes,” a report released Wednesday by the liberal Center on Budget and Policy Priorities said.
President Trump’s 2016 campaign adviser, Arthur Laffer, also widely regarded as the father of supply-side economics, said in January that Trump had the right to have the federal government borrow money then, while interest rates and the cost of the debt service were low, to pay for his policies. Interest rates and the cost of debt service have fallen even further since then.
The federal debt has not been a genuine concern for both parties for many years now, with Trump and top congressional leaders not demonstrating any eagerness to curb it. In fact, they’ve acted on a bipartisan basis to increase spending.
Biden plans to spend almost $7 trillion over the next decade on areas such as climate change, infrastructure, healthcare, and higher education. He has said he will pay for these ambitious initiatives with approximately $4 trillion in tax increases on the wealthy, on corporations, and on certain investments.
Furthermore, Biden has signaled that he will continue the historic levels of governmental relief spending that started in March in response to the coronavirus pandemic and its ensuing economic shutdowns.
Lower interest rates for paying off federal debt would allow Biden to borrow more money and give his administration greater flexibility to implement his agenda with fewer worries about the debt growing too quickly and having an economy that is expanding at a rate that is unsustainable.
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