Friday before Christmas, Congress passed a massive $1.7 trillion omnibus spending bill for fiscal 2023. Lost in the furious debate beforehand and afterward about the overspending involved was the fact that the $1.7 trillion entails only discretionary spending. There’s another $4 trillion-plus of annual spending, which is mandated by law. Social Security spending alone will exceed $1.3 trillion this fiscal year. Total annual federal spending in fiscal 2023 will far exceed $6 trillion.
The nation is spending well beyond its means. The nation ran a $1.4 trillion deficit in fiscal 2022, following a $2.8 trillion deficit in fiscal 2021 and a $3.1 trillion deficit in fiscal 2020. That’s $7.3 trillion in just three years. If, as many economists predict, we enter recession this year, the annual deficit will begin to rise again.
Deficits, of course, mean that we have to borrow to finance spending. Over the past three fiscal years, the national debt exploded from $17 trillion to $24 trillion plus.
Few people noticed, because interest rates were near zero, so there was little cost to this borrowing. Net interest on the federal debt barely budged from $376 billion in fiscal 2019 to $345 billion in fiscal 2020 to $352 billion in fiscal 2021. Once the Federal Reserve began hiking interest rates, everything changed. Even though interest rate hikes began in earnest only last June, federal net interest cost reached $475 billion in fiscal 2022.
In just the first two months of fiscal 2023, net interest cost has increased 50% over the prior comparable period — from $60 billion to $90 billion. That alone implies that net interest will exceed $700 billion for the full fiscal year. Yet, most of the 4.25% in interest rate hikes that the Federal Reserve has already imposed have been in place for less than a year, so they have not yet impacted most of federal debt outstanding and they are not fully reflected in the two-month 50% increase (the latest 0.50% increase in interest rates was put in place in December, so its impact is not reflected at all in the numbers for the first two months of the fiscal year).
Moreover, the Fed’s own guidance calls for further rate hikes and for high rates to persist for more than a year before any rate cuts, so higher interest rates will work their way further into national debt outstanding. On top of that, every month, Uncle Sam has to borrow to close the budget gap for that month; that new debt will have a cost. In the first two months of fiscal 2023, the deficit was $336 billion.
In fiscal 2023, net interest on the national debt is likely to become the fourth largest item in the federal budget, behind only Social Security, health care (excluding Medicare) and the national defense. There’s a reckoning looming. Uncle Sam is borrowing more and more just to pay interest on debt. In turn, borrowing is begetting more interest expense, which requires more borrowing. This is a classic debt trap. Before this becomes an inescapable vicious cycle, Washington needs to resolve to make major changes in the New Year — incredibly painful, but absolutely necessary changes. The furor over the omnibus completely missed this reality.