By Wolf Richter for WOLF STREET.
The long-term fiscal mess the US has been wallowing in for many years – the mindboggling deficits even during a strong economy that turned into the incredibly ballooning debt, encouraged and enabled by 14 years of the Fed’s free-money policies – is a long-term problem. It’s not a problem this year or next year, and that’s a contributor to the problem because that’s as far as politicians want to think, and beyond that, it’s after me, the deluge. And so we’re here, a step further down the road.
Tax receipts by the federal government in Q2 jumped by $69 billion, or by 10.2%, year-over-year to $751 billion, according to a measure released today by the Bureau of Economic Analysis as part of its Q2 GDP revision. Quarter-to-quarter, the seasonal dip in Q2, at -2.5%, was smaller than the average in past years: -4.7% in 2023, -2.0% in 2022, -2.9% in 2019, -4.4% in 2018, and -4.5% in 2017 (red in the chart below).
Interest payments by the government on its gigantic and ballooning pile of debt surged by $45 billion, or by 20%, year-over-year in Q2 to $272 billion (blue).
Tax receipts increase through inflation, growing employment, wage growth, a growing economy with higher profits from businesses, and bubbly financial markets. Inflation helps increase tax receipts by inflating taxable wages and taxable profits; and growing employment does so by more workers earning higher taxable wages.
Last year in Q1 and Q2, tax receipts had plunged on a year-over-year basis because capital gains tax receipts had plunged because 2022 had been crappy for investors, with big losses across many asset classes. This changed in 2023, with a huge rally in stocks, bonds, cryptos etc. So by tax day this year, those capital gains taxes were due.
This measure of tax receipts, released today by the BEA, tracks what’s available to pay for regular government expenditures, such as interest payments. Excluded from these receipts are contributions to Social Security and other social insurance that are paid specifically by contributors into those programs and are not available to pay for general expenditures.
Interest payments as % of tax receipts.
What matters the most in terms of how long this fiscal mess can be pushed further is the relationship of interest payments to tax receipts.
The ratio of interest payments as a percentage of tax receipts in Q2 rose to 36.3%, a notch higher than in Q3 2023, and the highest since 1997. This ratio shows to what extent interest payments are eating up the national income.
In the 15 years between 1982 and 1997, the ratio was higher than today; and in the 10 years between 1983 and 1993, it ranged from 45% to 52%, and the US was fishtailing toward a crisis. Eventually, Congress, which decides fiscal policy, trimmed the deficit, supported by inflation that was declining but continued to be fairly high and inflated taxable incomes and profits, then further helped along by the Dotcom Bubble, which generated massive capital gains taxes along with boosting employment and wage growth.
Maybe the US was lucky that time, but it worked, though it took 20 years from when this became a huge issue in 1981 to when it receded as an issue at around the turn of the millennium.
Interest payments have surged for three reasons:
The debt has ballooned at a mindboggling pace in recent years, and at the end of Q2 had reached $34.8 trillion. Since then, it has further ballooned to $35.3 trillion. This is what the government has to pay interest on.
The higher interest rates are filtering into the debt as old lower-interest-rate Treasury notes and bonds mature and are replaced with new Treasury securities that carry a higher interest rate.
Short-term Treasury bills have ballooned from $4 trillion a year ago to $6 trillion now, as the government has shifted issuance from longer-term notes and bonds to T-bills. Now, about 22% of the $27.8 trillion in marketable Treasury securities are T-bills, up from 16% a year ago.
T-bill yields have been over 5% since early 2023. This is the most expensive debt that the government currently has, and the government has increased this debt by 50% over the past year – one prong of its two-pronged strategy to push long-term interest rates down to stimulate the economy, in direct conflict with the Fed’s monetary policies.
In July, the average interest rate that the Treasury department paid on its total debt was 3.33%, the highest since January 2010, though that’s still fairly low by historical averages:
Other measures of the burden of the debt.
Interest payments as % of GDP. Interest payments dipped a hair to 3.8% of GDP in Q2, the second worst since 1998, just behind Q1 (figured as quarterly interest expense not adjusted for inflation, not seasonally adjusted; divided by quarterly GDP of $7.2 trillion in current dollars, not adjusted for inflation, not seasonally adjusted annual rate).
This does not look good:
Total debt as % of GDP dipped a hair to 121.6% in Q2 (figured as total debt at quarter end divided by quarterly GDP in current dollars seasonally adjusted annual rate).
The spike in Q2 2020 occurred because GDP crashed during the lockdown while the national debt spiked to pay for the stimulus programs. From Q3 2020 through Q1 2023, GDP recovered faster than the debt rose, and the ratio declined. But in Q2 2023, the trend reversed with GDP growing more slowly than the debt, and the ratio headed higher again.
In the free-money era from 2008 through 2012, which included the Great Recession, over those five years, the ratio shot from 63% to 100%. By the end of 2019, it was at 106%. Now it’s at 121.6%.
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