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May 5, 2010

All These Entitlements Add Up, Just Look at the Interest Expense



 When an individual borrows money, they owe the principal (the original amount they borrowed) plus an interest rate.  The interest rate is also known as the cost (or price) of borrowing money.  Just like individuals, when the federal government borrows money, it must pay interest as well.  Treasury Direct has a month by month cost for interest on the national debt.  For the purposes of this article, we are going to examine the interest expense from the White House’s budget.
All government entitlement costs equals the amount of income the government takes in annually.  This means that all other spending (military, agricultural subsidy, transportation, education, energy, veterans benefits, NASA, commercial development, and general government operations) must be financed by issuing debt.  Since the government is on track to borrow more than $10 trillion this decade, it’s clear that interest expenses on the debt are going to soar.  However, higher interest rates will also have drastic effects on the interest payments.



In the FY2010 Obama budget, interest expense on the debt was expected to be $392 billion in 2009.  For $10 trillion in debt, that amounts to an interest rate of about 3.9%.  In 2014, the interest on the debt is expected to be $823 billion.  However, by 2014, the national debt is expected to be $17 trillion.  This means the administration is counting on an interest rate of 4.8% by then. 
But what if the administration, in its infinite wisdom, is off about the interest rate? 
While a 4.8% interest rate in a stronger economy may seem viable (actually 5.5% seems more rational), we have to understand the threats to inflation that will plague our economy three or four years down the road as a result of loose money practices.  Inflation can cause interest rates to steepen as well.  For every 1% that interest rate is higher than the administration projects, the American taxpayers will pay $170 billion per year in additional interest expenses.  This amounts to around $250 for the average taxpayer per year.
If the interest rate is lower than the administration projects, than we most certainly must be in another recession at the time.  This is doubly bad because 1) it’s a recession and 2) recessions are now leading to deficit spikes, which means the government will spend even more than it projects, making our debt projection looking more like $20 trillion in 2014.
The interest on the debt in 2010 will cost $454 billion.  The average taxpayer will spend $1,133 in taxes to cover that interest this year and $8,247 over the next five years.  The Budget BS series has exposed $3,707 in liabilities for the average taxpayer this year for Social Security (in whole), interest on the debt (in whole), and all the entitlement increases enacted by President Obama.  Expanded out over the next five years, the average taxpayer’s liability is $22,910!
In conclusion, how did we allow ourselves to become this dependent on the federal government?  Is it because we cannot trust each other to act responsibly on our own behalf?  Is it because we did not think creatively about problems as they plagued our country, but simply transferred them to the federal government’s balance sheet?
On Friday, we will take a look at the new FY 2011 Obama budget and compare the Obama Administrations costs with their older estimates.

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