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A few encouraging budget indicators so far in Fiscal Year 2011

From msnbc.com's Tom Curry:  Despite Republican rhetoric about excessive spending and Democratic rhetoric about the failure to raise taxes on upper-income earners, the latest report from the non-partisan Congressional Budget Office shows that as of last month, almost halfway through the current fiscal year, federal revenues were up 8.5 percent while spending was up only 0.6 percent (excluding the effects of payments shifted because of weekends, holidays and other factors).

Meanwhile individual income tax revenues were up a healthy 26.6 percent, compared to the same period in fiscal year 2010.

Former Treasury Department official Eugene Steuerle said some of this increase in income tax revenues is due to the ending of the Making Work Pay tax credit which was part of the 2009 stimulus and which expired in December. 

Measuring the combined income tax and Social Security and Medicare taxes withheld so far this fiscal year, compared to last year, there has been a strong 10.7 percent increase, “which leaves one cautiously optimistic about the recovery,” Steuerle said.  

The growth areas in spending are Medicaid (up 6.3 percent) and interest payments on the federal debt.

The increased Medicaid spending is one sign that despite the news last Friday of 192,000 jobs being created in February, the overhang of unemployed people who’ve lost their health insurance and must rely on Medicaid is still a burden on both federal and state governments. 

As for debt, the CBO says, “Net interest on the public debt rose by $11 billion (or 13 percent) as a result of substantial growth in the national debt over the past year.”

This heavier debt load comes at a time when interest rates are historically low and the government is able to borrow cheaply: rates on the 10-year Treasury bond are about 3.6 percent, compared to their 50-year average of about 6.6 percent.

So if interest payments are a growing burden for the federal government when interest rates are historically low, what happens if they go up?

CBO gave some answers to that question in a recent letter it sent to House Budget Committee Chairman Paul Ryan who had asked the agency to assess scenarios in which interest rates are higher than CBO is assuming in its own forecast.

CBO’s estimate is that rates will go up in the next few years with the rate on the ten-year Treasury note hitting 5.4 percent by 2017. As a result, “interest payments on the debt are poised to skyrocket over the next decade,” CBO said in its budget outlook released in January.

But at Ryan’s request, CBO re-ran the numbers using the average interest rates over the period from 1991 to 2000 (when the ten-year Treasury rate was about 6 percent).

The results were ugly. If those 1991-2000 rates were in effect over the next ten years, it would add another $1.1 trillion to the interest costs CBO is projecting in its own forecast.