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Higher Rates Stoke a Growing Chorus of Deficit Concerns

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A long period of higher interest rates would make the government’s large debt pile costly, a possibility that is fueling a conversation about debt sustainability.The U.S. government’s persistent budget deficit and growing debts were low on Wall Street’s list of worries when interest rates were at rock bottom for years. But borrowing costs have risen so sharply that it is causing many investors and economists to fret that the United States’ big debt pile could prove less sustainable.Federal Reserve officials have raised interest rates to about 5.3 percent since early 2022 in a bid to control inflation. Officials predicted at their meeting last month that interest rates could remain high for years to come, shaking expectations among investors who had bet on rates falling notably as soon as next year.The realization that the Fed could keep borrowing costs high for a long time has combined with a cocktail of other factors to send long-term interest rates soaring in financial markets. The rate on 10-year Treasury bonds has been climbing since July, and reached a nearly two-decade high this week. That matters because the 10-year Treasury is like the market’s backbone: It helps drive many other borrowing costs, from mortgages to corporate debt.The exact cause of the latest run-up in Treasury rates is hard to pinpoint. Many economists say a combination of drivers is probably helping to drive the pop — including strong growth, fewer foreign buyers of America’s debt, and concerns about debt sustainability in and of itself.What’s clear is that if rates remain elevated, the federal government will need to pay investors more interest in order to fund its borrowing. America’s gross national debt stands just above $33 trillion, more than the total annual output of the American economy. The debt is projected to keep growing both in dollar figures and as a share of the economy.While the climbing cost of holding so much debt is stoking conversations among economists and investors about the appropriate size of the government’s annual borrowing, there is no consensus in Washington for deficit reduction in the form of either higher taxes or big spending cuts.Still, the renewed concern is a stark reversal after years in which mainstream economists increasingly thought that the United States might have been too timid when it came to its debt: Years of low interest rates had convinced many that the government could borrow cheap money to pay for relief in times of economic trouble and investments in the future.The deficit as a share of the economy rose this year under President Biden even though the economy was growing.Pete Marovich for The New York Times“How big of a problem deficits are depends — and it depends very critically on interest rates,” said Jason Furman, an economist at Harvard and former economic official under the Obama administration. “That’s changed a lot,” so “your view on the deficit should change as well.”Mr. Furman had previously estimated that the growing cost of interest on federal debt would remain sustainable for some time, after factoring in inflation and economic growth. But now that rates have climbed so much, the calculus has shifted, he said.Since 2000, the United States has run an annual budget deficit, meaning it spends more than it receives in taxes and other revenue. It has made up the gap by borrowing money.Tax cuts, spending increases and emergency economic assistance approved by both Democratic and Republican presidents has helped fuel the rising deficits in recent years. So has the aging of America’s population, which has driven up the costs of Social Security and Medicare without corresponding increases in federal tax rates. The deficit as a share of the economy rose this year under President Biden even though the economy was growing, just as it did in the prepandemic years under President Donald J. Trump.Now, borrowing costs are poised to add to the gap.Higher interest rates are a leading cause, along with surprisingly weak tax collections, of what the Congressional Budget Office projects will be a doubling of the federal budget deficit over the last year. The deficit, when properly measured, grew from $1 trillion in the 2022 fiscal year to an estimated $2 trillion in the 2023 fiscal year, which ended last month.If borrowing costs climb further — or simply remain where they are for an extended period — the government will accumulate debt at a much faster rate than officials expected even a few months ago. A budget update released by Biden administration economists in July predicted annual average interest rates on 10-year Treasury bonds would not exceed 3.7 percent at any time over the next decade. Those rates are now hovering around 4.7 percent.That recent surge in longer-term bond yields ties back to a number of factors.While the Federal Reserve has been raising short-term interest rates for roughly 18 months, rates on longer-term bonds had remained fairly stable over the first half of this year. But investors have been slowly coming around to the possibility that the Fed will leave interest rates higher for longer — partly because growth has remained solid even in the face of elevated borrowing costs.At the same time, there have been fewer buyers for government bonds. The Fed has been shrinking its balance sheet of bonds as it reverses a pandemic-era stimulus policy, which means that it is no longer buying Treasuries — taking away a source of demand. And key foreign governments have also pulled back from bond purchases.“We’ve whittled down to a smaller universe of buyers,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI.Some analysts have suggested that the pickup in bond yields could also tie back to concerns about debt sustainability. To pay higher interest costs, the government may need to issue even more debt, compounding the problem — and focusing attention on America’s mammoth debt pile, said Ajay Rajadhyaksha, global chairman of research at Barclays.“The problem is not just that number,” he said, referencing the increasing deficit. “The problem is that this economy is as good as it gets.”The economy has remained strong even though the Federal Reserve has raised borrowing costs. That has many expecting the Fed to leave rates higher for longer.Jim Wilson/The New York TimesThat, several economists have said, is the core of the issue: America is borrowing a lot even at a time when the unemployment rate is very low and growth is strong, so the economy does not need a lot of government help.“Right now we have an incredible amount of issuance at the same time as the Fed is messaging higher for longer,” said Robert Tipp, chief investment strategist at PGIM Fixed Income, noting that typically higher issuance comes in periods of turmoil when central bank policy is more accommodative. “This is like a wartime budget deficit but without any help from the central bank. That is why this is so different.”White House officials say it is too early to know whether rising bond yields should spur Mr. Biden to add new deficit-reduction proposals to the $2.5 trillion in plans he included in this year’s budget. Those proposals consist largely of tax increases on corporations and high earners.“We might be having a different discussion about this a month from now,” said Jared Bernstein, the chair of the White House Council of Economic Advisers. “And when you’re writing budgets, you don’t go back and change your path lightly.”The Treasury Department has sold close to $16 trillion of debt for the year through September, up roughly 25 percent from the same period last year, according to data from the Securities Industry and Financial Markets Association. Much of that issuance replaced existing debt that was coming due, leaving a net debt issuance of around $1.7 trillion, more than at any other point over the past decade except for the pandemic-induced bond binge in 2020. The Treasury’s own advisory committee forecasts the size of government debt sales to rise another 23 percent in 2024.Maya MacGuineas, the president of the bipartisan Committee for a Responsible Federal Budget and a longtime proponent of reducing deficits, said it was hard to tell what had caused rates to climb recently. Still, she said, the move serves as a “reminder.”“From a fiscal perspective, the story is very simple: If you borrow too much, you become increasingly vulnerable to higher interest rates,” she said.Santul Nerkar More

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    U.S. National Debt Tops $33 Trillion for First Time

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    The fiscal milestone comes as Congress is facing a new spending fight with a government shutdown looming.America’s gross national debt exceeded $33 trillion for the first time on Monday, providing a stark reminder of the country’s shaky fiscal trajectory at a moment when Washington faces the prospect of a government shutdown this month amid another fight over federal spending.The Treasury Department noted the milestone in its daily report detailing the nation’s balance sheet. It came as Congress appeared to be faltering in its efforts to fund the government ahead of a Sept. 30 deadline. Unless Congress can pass a dozen appropriations bills or agree to a short-term extension of federal funding at existing levels, the United States will face its first government shutdown since 2019.Over the weekend, House Republicans considered a short-term proposal that would slash spending for most federal agencies and resurrect tough Trump-era border initiatives to extend funding through the end of October. But the plan had little hope of breaking the impasse on Capitol Hill, with Republicans still divided on their demands and Democrats unlikely to support whatever compromise they reach among themselves.The debate over the debt has grown louder this year, punctuated by an extended standoff over raising the nation’s borrowing cap.That fight ended with a bipartisan agreement to suspend the debt limit for two years and cut federal spending by $1.5 trillion over a decade by essentially freezing some funding that had been projected to increase next year and then limiting spending to 1 percent growth in 2025. But the debt is on track to top $50 trillion by the end of the decade, even after newly passed spending cuts are taken into account, as interest on the debt mounts and the cost of the nation’s social safety net programs keeps growing.But slowing the growth of the national debt continues to be daunting.Some federal spending programs that passed during the Biden administration are expected to be more costly than previously projected. The Inflation Reduction Act of 2022 was previously estimated to cost about $400 billion over a decade, but according to estimates by the University of Pennsylvania’s Penn Wharton Budget Model it could cost more than $1 trillion thanks to strong demand for the law’s generous clean energy tax credits.Pandemic-era relief programs are still costing the federal government money. The Internal Revenue Service said last week that claims for the Employee Retention Credit, a tax benefit that was originally projected to cost about $55 billion, have so far cost the federal government $230 billion. The I.R.S. is freezing the program because of fears about fraud and abuse.At the same time, several of President Biden’s attempts to raise more revenue through tax changes have been met with resistance.In late 2022, the I.R.S. delayed by one year a new tax policy that would require users of digital wallets and e-commerce platforms to start reporting small transactions to the agency. The policy was projected to raise about $8 billion in additional tax revenue over a decade.Last month, the I.R.S. delayed by two years a new provision that will stop high earners from being able to funnel extra money into their 401(k) retirement accounts. The agency described the delay as an “administrative transition period.”Meanwhile, lobbyists are pressing for loopholes in new taxes that have been enacted. The 15 percent corporate alternative minimum tax was devised to ensure that rich companies could no longer get away with paying single-digit tax rates because of creative use of deductions. However, many of these companies have been pushing the Treasury Department, which is currently writing the rules that will govern the tax, to create exceptions to preserve their most prized deductions. That tax is different from the global minimum tax that most countries, except the United States, are working to adopt.The pushback against efforts to raise revenue and cut spending has heightened the sense of alarm among budget watchdog groups that fear that a fiscal crisis is approaching.“As we have seen with recent growth in inflation and interest rates, the cost of debt can mount suddenly and rapidly,” said Michael A. Peterson, the chief executive of the Peter G. Peterson Foundation, which promotes fiscal restraint. “With more than $10 trillion of interest costs over the next decade, this compounding fiscal cycle will only continue to do damage to our kids and grandkids.”Republicans and Democrats in the House and the Senate continue to be divided on a path forward to avoid the near-term problem of a shutdown, and lawmakers have started pressing for leaders to begin focusing on a stopgap bill to keep the government operating past Sept. 30.But the red ink continues to mount.A Treasury Department report last week showed that the deficit — the gap between what the United States spends and what it collects through taxes and other revenue — was $1.5 trillion for the first 11 months of the fiscal year, a 61 percent increase from the same period a year ago.In an interview with CNBC on Monday, Treasury Secretary Janet L. Yellen said she was comfortable with the nation’s fiscal course because interest costs as a share of the economy remained manageable. However, she suggested that it was important to be mindful of future spending.“The president has proposed a series of measures that would reduce our deficits over time while investing in the economy,” Ms. Yellen said, “and this is something we need to do going forward.” More

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    Biden Accuses Republicans of Undercutting Working-Class Americans

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    President Biden trained his criticism on House Republicans who are threatening to shut down the federal government if their budget cuts are not enacted.President Biden challenged his Republican opponents on Thursday in their area of political strength, arguing that he has done a better job of managing the economy than former President Donald J. Trump did and accusing his predecessor’s congressional allies of undercutting working-class Americans.While Mr. Trump has long made his stewardship of the economy his most salient bragging point, Mr. Biden declared that his “Bidenomics” program had done more to help everyday Americans make a living than what he termed “MAGAnomics” ever did. He framed the argument in terms of the fall’s coming budget battles, but it also represented a preview of next year’s campaign.“They have a very different vision for America,” Mr. Biden said in a speech at Prince George’s Community College in Largo, Md., just outside the nation’s capital, where he held up a copy of budget plans by House Republicans. “Their plan, MAGAnomics, is more extreme than anything America has ever seen before.”Mr. Biden trained his criticism on Republicans who are threatening to shut down the federal government if their plans are not enacted. The president accused the Republicans of caring more about the wealthy than the working class, pointing to proposals to cut taxes for high-income households and corporations; wring savings from Social Security, Medicare and Medicaid; and reverse initiatives to lower the cost of insulin and other prescription medicine.The intensified criticism of Republicans follows months of speeches and other messaging by the president and his team promoting the benefits of Bidenomics, a phrase used by critics that they have chosen to embrace. But the credit-taking has not budged Mr. Biden’s poll numbers, and so White House officials now plan to spend the next few weeks or longer emphasizing the contrast with his opponents.“House Republicans have understandably been reluctant to tout the MAGAnomics Budget — but the White House is going to spend much of this fall doing it for them,” Anita Dunn, a senior adviser to the president, wrote in a memo released to reporters.Mr. Biden faces strong political headwinds on the economy. A new poll released on Thursday by USA Today and Suffolk University found that only 22 percent of Americans think the economy is improving while 70 percent think it is getting worse. Asked to volunteer a single word to describe the economy, a majority came up with terms like “horrible,” “terrible,” “crashing,” “shambles,” “chaotic” and “expensive.”Just 34 percent of Americans approved of Mr. Biden’s handling of the economy and, when asked to choose, more expressed faith in his predecessor to improve the country’s economic health than they did in the incumbent, 47 percent to 36 percent.Mr. Trump sought to rebut Mr. Biden even before the speech. “The public has not been fooled,” his campaign said in a statement. “They see Bidenomics for what it is: inflation, taxation, submission and failure.”“With polls confirming that Americans overwhelmingly reject Biden’s effort to whitewash his abysmal economic record,” the statement added, “he will now attempt to reverse his message 180 degrees, ludicrously trying to blame President Trump for the destruction and misery that Joe Biden himself has wrought.”Mr. Trump has always used superlatives to exaggerate the strength of the economy while he was in office. While he presided over a strong and generally healthy economy, it was not the best in history, as he has often stated, and before the pandemic it was roughly comparable in many ways to the economy of the last few years of his predecessor, President Barack Obama.During Mr. Trump’s first two years in office, the economy grew an average of 2.5 percent per quarter on an annualized basis, while it grew an average of 3.1 percent per quarter in Mr. Biden’s first two years coming out of the pandemic, according to a comparison by Barron’s. The stock market soared by 21 percent during the early part of Mr. Trump’s tenure compared with 8.5 percent during a comparable period under Mr. Biden.Unemployment has been roughly similar during the two administrations, at 3.8 percent near a record low, but job growth under Mr. Biden has far surpassed that under Mr. Trump as the economy rebounds from Covid-19 lockdowns. By last spring, monthly job growth had averaged 470,000 since Mr. Biden took office, compared with 180,000 in the start of Mr. Trump’s administration, Barron’s calculated.Where Mr. Biden has struggled most economically is with inflation, which averaged around 2 percent under Mr. Trump but peaked at 9 percent last year under Mr. Biden before falling to about 3.7 percent now. Inflation has increased the cost of groceries, clothes, household goods and housing, while eating away at rising wages. The federal deficit is also rising sharply, as have interest rates.Still, the recession many feared has yet to materialize, and many experts now are more optimistic about what they call a soft landing. Mr. Biden argues that his expansive legislative program has positioned the country for the future better than Mr. Trump ever did through new or repaired airports, roads, bridges and other infrastructure; vast investment in the semiconductor industry; ambitious clean energy programs to combat climate change; and initiatives to bring down the cost of prescription drugs.“America has the strongest economy in the world of all major economics,” Mr. Biden said. “But all they do is attack it. But you notice something? For all the time they spend attacking me and my plan, here’s what they never do — they never talk about what they want to do.” He added: “It’s like they want to keep it a secret. I don’t blame them.” More

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    White House Hits Back on Fitch Credit Downgrade, Protecting Biden

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    The president’s team has mobilized to counter the downgrade of Treasury debt by the Fitch Ratings agency, rushing to defend the story of an improving economic outlook.When the Fitch Ratings agency announced this week that it was downgrading its long-term credit rating of the United States from AAA to AA+, Biden administration officials were ready — and angry.Administration officials had been lobbying Fitch against the downgrade, which bewildered many economists but became immediate fodder for congressional Republicans and nonpartisan budget hawks to criticize the nation’s current fiscal direction.When the ratings agency went through with the move anyway, President Biden’s team mobilized a rapid response, with economic heavyweights inside and outside the administration criticizing the timing and substance of the announcement.The swift pushback was an effort to keep the downgrade from tarnishing Mr. Biden’s economic record amid a run of good news in key measures of the health of the American economy. And its aggressiveness reflected the critical importance of an improving economic outlook to Mr. Biden’s re-election campaign.“What was important to the president was to point out not only was the Fitch decision arbitrary and outdated, but his administration has taken action to accomplish things that go in the exact opposite of the markdown,” Jared Bernstein, the chairman of the White House Council of Economic Advisers, said in an interview, citing a bipartisan deal to raise the debt limit and modestly reduce federal spending.“One reason why we punched back hard is because Fitch completely ignored accomplishments under this president, both on fiscal policy and on economic growth,” he said.The White House got lucky in one respect. Coverage of the downgrade was immediately swamped by the third criminal indictment of former President Donald J. Trump.It was an extension of a trend that has both helped and hurt Mr. Biden so far this year: Over the past six months, according to a Stanford University database, television networks have focused as much on news about his predecessor as on news about Mr. Biden.Also helping Mr. Biden was that investors largely shrugged off the Fitch Ratings move. Researchers at Goldman Sachs wrote on Wednesday that “the downgrade should have little direct impact on financial markets.”The downgrade came just after 5 p.m. on Tuesday. Fitch released a statement that attributed the move to “the expected fiscal deterioration over the next three years, a high and growing general government debt burden and the erosion of governance” in the United States over the past two decades.Most notably, Fitch officials cited a series of high-stakes showdowns over raising the nation’s borrowing limit. “The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” they wrote.The agency also expressed concerns over the rising costs of Medicare and Social Security benefits as more Americans retire, which are predicted to be the largest drivers of rising federal debt in the decade to come. Fitch predicted that the nation was headed for a mild recession by the end of the year. It was the second credit downgrade in American history, both directly linked to debt limit fights.Moments after the release, Biden administration officials hit back.Janet L. Yellen, the Treasury secretary, said in a statement that she strongly disagreed with a ratings change that she called “arbitrary and based on outdated data.”Soon after, administration officials organized a call with reporters to criticize the move in more detail. They questioned why Fitch had not downgraded the rating when Mr. Trump was president, based on Fitch’s own ratings models, and why it had done so now, soon after a compromise with Republicans in Congress that had averted a fiscal crisis.They rejected the agency’s recession prediction, citing strong recent economic data. They said the president was committed to further spending cuts — along with tax increases on corporations and the wealthy — to further reduce budget deficits in the future.Officials also pointed reporters to a range of outside economists and analysts who criticized the decision.Republicans quickly used the downgrade to criticize Mr. Biden.“With annual deficits projected to double and interest costs expected to triple in just 10 years, our nation’s financial health is rapidly deteriorating and our debt trajectory is completely unsustainable,” said Representative Jodey C. Arrington of Texas, the chairman of the House Budget Committee. “This is a wake-up call to get our fiscal house in order before it’s too late.”Fiscal hawks have been warning for more than a decade that America’s debt could grow unsustainable. Those calls grew as lawmakers borrowed trillions to help people, businesses and governments endure the Covid-19 pandemic. The cost of federal borrowing rose sharply over the past year as the Federal Reserve raised interest rates to combat inflation. More

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    U.S. Credit Rating Is Downgraded by Fitch

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    The ratings agency, which lowered the U.S. long-term rating from its top mark, said debt-limit standoffs had eroded confidence in the nation’s fiscal management.The long-term credit rating of the United States was downgraded on Tuesday by the Fitch Ratings agency, which said the nation’s high and growing debt burden and penchant for brinkmanship over America’s authority to borrow money had eroded confidence in its fiscal management.Fitch lowered the U.S. long-term rating to AA+ from its top mark of AAA. The downgrade — the second in America’s history — came two months after the United States narrowly avoided defaulting on its debt. Lawmakers spent weeks negotiating over whether the United States, which ran up against a cap on its ability to borrow money on Jan. 19, should be allowed to take on more debt to pay its bills. The standoff threatened to tip the United States into default until Congress reached a last-minute agreement in May to suspend the nation’s debt ceiling, which allowed the United States to keep borrowing money.Despite that agreement, the federal government now faces the prospect of a shutdown this fall, as lawmakers spar over how, where and what level of federal funds should be spent. The nonstop dueling over federal spending was a major factor in Fitch’s decision to downgrade America’s debt.“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch said in a statement. “In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.”Fitch pointed to the growing levels of U.S. debt in recent years as lawmakers passed new tax cuts and spending initiatives. The firm noted that the U.S. had made only “limited progress” in tackling challenges related to the rising costs of programs such as Social Security and Medicare, whose costs are expected to soar as the U.S. population ages.Fitch is one of the three major credit ratings firms, along with Moody’s and S&P Global Ratings. In 2011, S&P downgraded the U.S. credit rating amid a debt-limit standoff — the first time the United States was removed from a list of risk-free borrowers.By one common measure, Fitch’s move downgrades America’s credit rating not only under the rating agency’s own assessment, but also for the blended rating of the three largest agencies.At the margin, the move by Fitch could limit the number of investors able to buy U.S. government debt, analysts have warned. Some investors are bound by constraints on the quality of the debt they can buy, and those that require a pristine credit rating across the three major agencies will now need to look elsewhere to fulfill investment mandates.That could nudge up the cost of the government’s borrowing at a time when interest rates are already at a 22-year high. Most analysts, however, doubt that the impact will be severe given the sheer size of the Treasury market and the ongoing demand from investors for U.S. Treasury securities.Still, the downgrade is a blemish on the nation’s record of fiscal management. The Biden administration on Tuesday offered a forceful rebuttal of the Fitch decision — criticizing its methodology and arguing that the downgrade did not reflect the health of the U.S. economy.“Fitch’s decision does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s pre-eminent safe and liquid asset, and that the American economy is fundamentally strong,” Treasury Secretary Janet L. Yellen said in a statement.Ms. Yellen described the change as “arbitrary” and noted that Fitch’s ratings model showed U.S. governance deteriorating from 2018 to 2020 but that it did not make changes to the U.S. rating until now.Biden administration officials, speaking on the condition of anonymity, said that they had been briefed by Fitch ahead of the downgrade and made their disagreements known. They noted that Fitch representatives repeatedly brought up the Jan. 6, 2021, insurrection as an area of concern about U.S. governance.The downgrade came on the same day that former President Donald J. Trump was indicted in connection with his widespread efforts to overturn the 2020 election, which fueled the Jan. 6 riot.Senator Chuck Schumer of New York, the majority leader, said the Fitch downgrade was the fault of Republicans, who refused to raise America’s borrowing cap without steep concessions. He urged them to stop using the debt limit for political leverage.“The downgrade by Fitch shows that House Republicans’ reckless brinkmanship and flirtation with default has negative consequences for the country,” Mr. Schumer said.The debt limit agreement reached in June cuts federal spending by $1.5 trillion over a decade, in part by freezing some funding that was projected to increase next year and capping spending to 1 percent growth in 2025.Lawmakers and the White House avoided making big cuts to politically sensitive — and expensive — initiatives, including retirement programs. Even with the spending curbs the national debt — which is over $32 trillion — is poised to top $50 trillion by the end of the decade.It is unlikely that the downgrade by Fitch will convince lawmakers to drastically change the fiscal trajectory of the United States.“Instead of effectuating change, or fiscal discipline, our base case expectation is that Fitch will be pilloried by most members of Congress,” said Henrietta Treyz, director of macroeconomic policy research at Veda Partners. “It will not yield either deficit reduction, tax increases, reductions in military spending, entitlement reform or a change to the 12 appropriations bills that have already moved with substantial bipartisan support in the U.S. Senate.” More

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    U.S. National Debt Tops $32 Trillion for First Time

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    The milestone follows a recent congressional showdown over lifting the debt ceiling. Another spending fight looms this year.The gross national debt exceeded $32 trillion for the first time on Friday, underscoring the country’s unsettling fiscal trajectory as Washington gears up for another fight over government spending.A Treasury Department report noted the milestone weeks after Congress agreed to suspend the nation’s statutory debt limit, ending a monthslong standoff.The $32 trillion mark arrived nine years sooner than prepandemic forecasts had projected, reflecting the trillions of dollars of emergency spending to address Covid-19’s impact along with a run of sluggish economic growth.Republicans and Democrats have expressed concern about the nation’s debt, but neither party has shown an appetite to tackle its biggest drivers, such as spending on Social Security and Medicare.The recent bipartisan agreement suspending the debt limit for two years cuts federal spending by $1.5 trillion over a decade, according to the Congressional Budget Office, by essentially freezing some funding that had been projected to increase next year and then limiting spending to 1 percent growth in 2025. But the debt is on track to top $50 trillion by the end of the decade even after newly passed spending cuts are taken into account.Mark Zandi, the chief economist of Moody’s Analytics, said during the standoff in May that spending cuts proposed by lawmakers failed to address the costs of social safety net programs. While avoiding a default would prevent an immediate crisis, he said, the ballooning debt is a persistent problem that needs to be addressed.“The nation’s daunting long-term fiscal challenges remain,” Mr. Zandi said.This week, the House Appropriations Committee began considering its next spending bills and, to appease the Republican majority’s ultraconservative wing, signaled that it would fund federal agencies at levels lower than President Biden and Speaker Kevin McCarthy had agreed to.A failure to pass and reconcile House and Senate bills by Oct. 1 could lead to a government shutdown. And if the individual bills are not approved by the end of the year, a 1 percent automatic cut will take effect.At the same time, House Republicans started considering a new round of tax cuts this week. The bill would expand the standard deduction for individual taxpayers and some business tax benefits that are intended to promote investment while curbing energy tax credits. The Committee for a Responsible Federal Budget, which advocates lower spending levels, estimates that the proposed legislation would cost $80 billion over a decade or $1.1 trillion if the measures were made permanent.Some have called on Congress to form a bipartisan fiscal commission to tackle the long-term drivers of the national debt.“As we race past $32 trillion with no end in sight, it’s well past time to address the fundamental drivers of our debt, which are mandatory spending growth and the lack of sufficient revenues to fund it,” said Michael A. Peterson, the chief executive of the Peter G. Peterson Foundation, which promotes deficit reduction.The Peterson Foundation expressed concern about projections that show the United States adding $127 trillion in debt over the next 30 years and interest costs consuming nearly 40 percent of all federal revenues by 2053.Treasury Secretary Janet L. Yellen defended the Biden administration’s handling of the nation’s finances at a House Financial Services Committee hearing this week, noting that the White House had released a budget this year reducing the deficit by $3 trillion. She also told the panel that interest rates were likely to decline over the medium term, making the debt burden more manageable.The Treasury secretary suggested that tax policies promoted by Republicans would worsen the fiscal situation.“They would benefit wealthy individuals and corporations and do nothing for working families,” Ms. Yellen said. “It’s not paid for, and it would exacerbate the debt.” More

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    A $1 Trillion Borrowing Binge Looms After Debt Limit Standoff

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    The government has avoided default, but the effects of the debt-ceiling brinkmanship may still ripple across the economy.The United States narrowly avoided a default when President Biden signed legislation on Saturday that allowed the Treasury Department, which was perilously close to running out of cash, permission to borrow more money to pay the nation’s bills.Now, the Treasury is starting to build up its reserves and the coming borrowing binge could present complications that rattle the economy.The government is expected to borrow around $1 trillion by the end of September, according to estimates by multiple banks. That steady state of borrowing is set to pull cash from banks and other lenders into Treasury securities, draining money from the financial system and amplifying the pressure on already stressed regional lenders.To lure investors to lend such huge amounts to the government, the Treasury faces rising interest costs. Given how many other financial assets are tied to the rate on Treasuries, higher borrowing costs for the government also raise costs for banks, companies and other borrowers, and could create a similar effect to roughly one or two quarter-point rate increases from the Federal Reserve, analysts have warned.“The root cause is still very much the whole debt ceiling standoff,” said Gennadiy Goldberg, an interest rate strategist at TD Securities.Some policymakers have indicated that they may opt to take a break from raising rates when the central bank meets next week, in order to assess how policy has so far impacted the economy. The Treasury’s cash rebuild could undermine that decision, because it would push borrowing costs higher regardless.That could in turn exacerbate worries among investors and depositors that flared up in the spring over how higher interest rates had eroded the value of assets held at small and medium sized banks.The deluge of Treasury debt also amplifies the effects of another Fed priority: the shrinking of its balance sheet. The Fed has curtailed the number of new Treasuries and other debt that it buys, slowly letting old debt roll-off and already leaving private investors with more debt to digest.“The potential hit to the economy once Treasury goes to market selling that much debt could be extraordinary,” said Christopher Campbell, who served as assistant Treasury secretary for financial institutions from 2017 to 2018. “It’s difficult to imagine Treasury going out and selling what could be $1 trillion of bonds and not have that have an impact on borrowing costs.”The cash balance at the Treasury Department’s general account fell below $40 billion last week as lawmakers raced to reach an agreement to increase the nation’s borrowing cap. Mr. Biden on Saturday signed legislation that suspended the $31.4 trillion debt limit until January 2025.For months, Treasury Secretary Janet L. Yellen had been using accounting maneuvers known as extraordinary measures to delay a default. Those included suspending new investments in retirement funds for postal workers and civil servants.Restoring those investments is essentially a simple accounting fix, but refilling the government’s cash coffers is more complicated. The Treasury Department said on Wednesday that it hoped to borrow enough to rebuild its cash account to $425 billion by the end of June. It will need to borrow much more than that to account for planned spending, analysts said.“The supply floodgates are now open,” said Mark Cabana, an interest rate strategist at Bank of America.A Treasury Department spokesman said that when making decisions on issuing debt, the department carefully considered investor demand and market capacity. In April, Treasury officials started surveying key market players about how much they thought the market could absorb after the debt-limit standoff was resolved. The Federal Reserve Bank of New York this month asked large banks for their estimates of what they expected to happen to bank reserves and borrowing from certain Fed facilities in the next months.The spokesman added that the department had managed similar situations before. Notably, after a bout of debt-limit wrangling in 2019, the Treasury Department rebuilt its cash pile over the summer, contributing to factors that drained reserves from the banking system and upended the market’s plumbing, prompting the Fed to intervene to stave off a worse crisis.One of the things the Fed did was establish a program for repurchase agreements, a form of financing with Treasury debt posted as collateral. That backstop could provide a safety net to banks short on cash from lending to the government, though its use was widely seen in the industry as a last resort.A similar but opposite program, which doles out Treasury collateral in exchange for cash, now holds over $2 trillion, mostly from money market funds that have struggled to find attractive, safe investments. This is viewed by some analysts as money on the sidelines that could flow into the Treasury’s account as it offers more attractive interest rates on its debt, reducing the impact of the borrowing spree.But the mechanism by which the government sells its debt, debiting bank reserves held at the Fed in exchange for the new bills and bonds, could still test the resilience of some smaller institutions. As their reserves decline, some banks may find themselves short on cash, while investors and others may not be willing to lend to institutions they see as troubled, given recent worries about some corners of the industry.That could leave some banks reliant on another Fed facility, set up at the height of this year’s banking turmoil, to provide emergency funding to deposit taking institutions at relatively high cost.“You may see one or two or three banks caught unprepared and suffer the consequences, starting a daisy chain of fear that can permeate through the system and create trouble,” Mr. Goldberg of TD Securities said. More

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    Biden’s Debt Ceiling Strategy: Win in the Fine Print

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    The president and his negotiators believe they worked out a deal that allowed Republicans to claim big spending cuts even as the reality was far more modest.Shalanda Young couldn’t sleep.A small team of Biden administration officials had spent the past two days in intense negotiations with House Republicans in an attempt to avert a catastrophic government default. Ms. Young, the White House budget director, had been trading proposals on federal spending caps with negotiators deputized by Speaker Kevin McCarthy, whose Republican caucus was refusing to raise the nation’s $31.4 trillion borrowing limit without deep cuts.Now, as she scrolled Netflix in search of “bad television” to distract her racing mind, Ms. Young had a sinking feeling. What if she cut a deal to reduce spending and raise the debt limit, only to see Republicans attempt to force through much deeper cuts when it came time to pass annual appropriations bills this fall?At work the next morning, Ms. Young asked her staff how to stop that from happening. They settled on a plan, which in essence would penalize Republicans’ most cherished spending programs if they failed to follow the contours of the agreement. Then they forced Republicans to include that plan in the legislative text codifying the deal.That approach reflected a broader strategy President Biden’s team followed in the debt limit negotiations, according to interviews with current and former administration officials, some Republicans and other people familiar with the talks.On Saturday, that strategy reached its conclusion as Mr. Biden signed the Fiscal Responsibility Act of 2023 into law, just days before a potential default and following weeks of talks and a revolt from right-wing lawmakers in the House that put an agreement at risk of collapse.In pursuit of an agreement, the Biden team was willing to give Republicans victory after victory on political talking points, which they realized Mr. McCarthy needed to sell the bill to his conference. They let Mr. McCarthy’s team claim in the end that the deal included deep spending cuts, huge clawbacks of unspent federal coronavirus relief money and stringent work requirements for recipients of federal aid.But in the details of the text and the many side deals that accompanied it, the Biden team wanted to win on substance. With one large exception — a $20 billion cut in enforcement funding for the Internal Revenue Service — they believe they did.The way administration officials see it, the full final agreement’s spending cuts are nothing worse than they would have expected in regular appropriations bills passed by a divided Congress. They agreed to structure the cuts so they appeared to save $1.5 trillion over a decade in the eyes of the nonpartisan Congressional Budget Office. But thanks to the side deals — including some accounting tricks — White House officials estimate that the actual cuts could total as little as $136 billion over the two enforceable years of the spending caps that are central to the agreement.Much of the $30 billion in clawed-back Covid-19 money was probably never going to be spent, Biden officials say, including dollars from an aviation manufacturing jobs program that had basically ended.At one point in the talks, administration officials offered to include in the deal more than 100 relief programs from which they were willing to rescind money. The final list spanned 20 pages of a 99-page bill, and Mr. McCarthy championed it on the House floor. But because much of the money was repurposed for other spending, the net savings added up to only about $11 billion over two years. One of the programs had a remaining balance of just $40.Many Democrats remain furious that the deal included new work requirements that could push 750,000 people off food stamps, which the Biden team begrudgingly concluded it had to accept.That measure alone could have tanked Democratic support for the deal in Congress, officials knew. So they sought to counterbalance it with efforts to expand food stamp eligibility for veterans, the homeless and others, which Republicans agreed to do. The budget office concluded that the changes would actually add recipients to the program, on net.Some Democrats and progressive groups have sharply criticized Mr. Biden for negotiating over the debt limit at all, denouncing the spending cuts and work requirements and saying he cemented Republicans’ ability to ransom the borrowing limit whenever a Democrat occupies the White House.Republican negotiators sold the deal as a game-changing blow to Mr. Biden’s spending ambitions. “They absolutely have tire tracks on them in this negotiation,” Representative Garret Graves of Louisiana said before the House vote on Wednesday.Mr. Biden views it differently. As the Senate prepared to pass the agreement on Thursday evening, he huddled with his chief of staff, Jeffrey D. Zients, along with Steve Ricchetti, counselor to the president, and other aides, in Mr. Zients’s office in the West Wing of the White House. Mr. Biden asked them what you might call a scorecard question: What percentage of Democrats in the House had voted for the deal, and what share were expected to in the Senate?When Mr. Ricchetti told him the number of Democrats would be larger, in both chambers, than the share of Republicans supporting the deal, Mr. Biden was pleased. It was validation, in his view, that he had cut a good deal.Mr. Zients referred to that vote share in an interview on Friday. “If you go back a few months ago, no one would have thought this was possible,” he said.It was not an assured outcome. The negotiating teams came to the table with divergent views of the drivers of federal debt in recent years. White House negotiators blamed Republican tax cuts. Republicans blamed Mr. Biden’s economic agenda, including a debt-financed Covid relief bill in 2021 and a bipartisan infrastructure bill later that year.The dispute occasionally grew profane. At one point, after Mr. Biden’s negotiators criticized the 2017 Republican tax cuts, a “very mild-mannered” aide to Mr. McCarthy stood up, shook his finger at the Biden team and hotly responded that their argument was nonsense, using a vulgarity, Mr. Graves recounted.Mr. Biden had insisted for months that he would not negotiate over raising the borrowing limit. But privately, many aides had been planning on talks all along — though they refused to admit those talks were linked to the debt limit. The Biden team reasoned that it would have to negotiate fiscal issues this year anyway, both on appropriations bills and on programs like food stamps that are included in a regularly reauthorized farm bill.Mr. Biden’s economic advisers, including Lael Brainard, the director of the National Economic Council, and Treasury Secretary Janet L. Yellen, were warning of catastrophic damage to the economy if the government could no longer pay its bills on time.The president appeared to score wins before the talks even started. He goaded Republicans into agreeing, in the midst of his State of the Union address, that Social Security and Medicare would be off limits in the talks — thanks to a spontaneous riff that grew out of a passage in his speech that he had worked on extensively in the days beforehand. He proposed a budget filled with tax increases on the rich and corporations that were meant to reduce debt, but he refused to engage Mr. McCarthy in serious talks until Republicans offered a spending plan of their own.In late April, the House passed a bill that included $4.7 trillion in savings from spending cuts, canceling clean-energy tax breaks and clawing back money for Covid relief and the I.R.S. It featured work requirements and measures to speed fossil fuel projects, and it raised the debt limit for one year.Mr. Biden, under fire from business groups and others who feared the standoff could result in the United States running out of money before the debt limit was raised, soon agreed to designate a team of negotiators. The White House team was led by officials including Ms. Young and one of her top aides, Michael Linden, who delayed his departure from the White House to help negotiate along with Louisa Terrell, the legislative affairs director, and Mr. Ricchetti.Mr. McCarthy’s negotiators gave Biden officials the impression that to reach agreement, they needed at least one talking point from every major aspect of the House Republican debt limit bill.The talks took a few surprising turns. Multiple White House officials say the Republican team briefly entertained relatively modest proposals to raise tax revenue, including closing loopholes that benefit some real-estate owners and people who trade cryptocurrency. Those discussions stalled quickly.Democrats agreed to fast-track a natural gas pipeline, in what officials concede was making good on a promise to Senator Joe Manchin III, Democrat of West Virginia, for backing Mr. Biden’s signature climate law last year.The spending caps ended up roughly where many Biden aides had predicted they would in private discussions months ago. But few White House officials believed they would have to give up $20 billion of the $80 billion that Democrats approved last year to help the I.R.S. crack down on tax cheats. Mr. Biden hammered out the amount in a final call with Mr. McCarthy.Ms. Young said that cut was painful. “And not just for me,” she added. “It’s something we talked to the president about many times. He cares deeply about this.”On Thursday evening in Mr. Zients’s office, the president and his team were focused on upsides. They had beaten back Republican attempts to cancel the climate law, to add new work requirements on Medicaid recipients and to impose binding spending caps for a decade. Mr. Biden was particularly pleased to spare key veterans’ programs from cuts.On Friday morning, Mr. Zients gathered core officials in his office, as he had every day, seven days a week, for several weeks running. Ms. Brainard and the economic team were relieved to have cleared the threat of default not just for this year, but through the next presidential election. Aides worked on honing Mr. Biden’s planned remarks in an Oval Office address on Friday evening.The speech started at 7:01 p.m., unusually promptly for Mr. Biden. By then, his staff was already celebrating. An hour earlier, happy hour had begun in Mr. Zients’s office.Catie Edmondson More

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    The Debt-Ceiling Deal Suggests Debt Will Keep Growing, Fast

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    The bipartisan deal to avert a government default this week featured modest cuts to a relatively small corner of the federal budget. As a curb on the growth of the nation’s $31.4 trillion debt load, it was a minor breakthrough, at best.It also showed how difficult — perhaps impossible — it could be for lawmakers to agree anytime soon on a major breakthrough to demonstrably reduce the nation’s debt load.There is no clear economic evidence that current debt levels are dragging on economic growth. Some economists contend that rising debt levels will hurt growth by making it harder for businesses to borrow money; others say spiraling future costs of government borrowing could unleash rapid inflation.But Washington is back to pretending to care about debt, which is poised to top $50 trillion by the end of the decade even after accounting for newly passed spending cuts.With that pretense comes the reality that the fundamental drivers of American politics all point toward the United States borrowing more, not less.The bipartisan agreement to suspend the debt ceiling for two years, which passed the Senate on Thursday, effectively sets overall discretionary spending levels over that period. The agreement cuts federal spending by $1.5 trillion over a decade, according to the Congressional Budget Office, by essentially freezing some funding that had been projected to increase next year and then limiting spending to 1 percent growth in 2025.But even with those savings, the agreement provides clear evidence that the nation’s overall debt load will not be shrinking anytime soon.Republicans cited that mounting debt burden as a reason to refuse to raise the limit, risking default and financial crisis, unless Mr. Biden agreed to measures to reduce future deficits. But negotiators from the White House and House Republican leadership could only agree to find major savings from nondefense discretionary spending.That’s the part of the budget that funds Pell grants, federal law enforcement and a wide range of domestic programs. As a share of the economy, it is well within historical levels, and it is projected to fall in the coming years. Currently, base discretionary spending accounts for less than one-eighth of the $6.3 trillion the government spends annually.The deal included no major cuts to military spending, which is larger than base nondefense discretionary spending. Early in the talks, both parties ruled out changes to the two largest drivers of federal spending growth over the next decade: Social Security and Medicare. The cost of those programs is expected to soar within 10 years as retiring baby boomers qualify for benefits.While Republicans at first balked when Mr. Biden accused them of wanting to cut those politically popular programs, they quickly switched to blaming the president for taking them off the table.Asked on Fox News on Wednesday why Republicans had not targeted the entire budget for cuts, Speaker Kevin McCarthy replied, “Because the president walled off all the others.”“The majority driver of the budget is mandatory spending,” he said. “It’s Medicare, Social Security, interest on the debt.”Negotiators for Mr. McCarthy effectively walled off the other half of the debt equation: revenue. They rebuffed Mr. Biden’s pitch to raise trillions of dollars from new taxes on corporations and high earners, and both sides wound up agreeing to cut funding for the Internal Revenue Service that was expected to bring in more money by cracking down on tax cheats.Instead, Republicans attempted to frame mounting national debt as solely a spending problem, not a tax-revenue problem, even though tax cuts by both parties have added trillions to the debt since the turn of the century.Republican leaders now appear poised to introduce a new round of tax-cut proposals, which would likely be financed with borrowed money, a move Democrats decried during the floor debate over the debt-ceiling deal.“Before the ink is dry on this bill, you will be pushing for $3.5 trillion in business tax cuts,” Representative Gwen Moore, Democrat of Wisconsin, said shortly before the final vote on the Fiscal Responsibility Act, as it is called, on Wednesday.Those comments reflected a lesson Democrats took from 2011, when Washington leaders last made a big show of pretending to care about debt in a bipartisan deal to raise the borrowing limit. That agreement, between President Barack Obama and Speaker John Boehner, limited discretionary spending growth for a decade, helping to drive down budget deficits for years.Many Democrats now believe those lower deficits gave Republicans the fiscal and political space they needed to pass a tax-cut package in 2017 under President Donald J. Trump that the Congressional Budget Office estimated would add nearly $2 trillion to the national debt. They have come to believe that Republicans would happily do the same again with any future budget deals — putting aside deficit concerns and effectively turning budget savings into new tax breaks.At the same time, both parties have grown more wary of cuts to Social Security and Medicare. Mr. Obama was willing to reduce future growth of retirement benefits by changing how they were tied to inflation; Mr. Biden is not. Mr. Trump won the White House after promising to protect both programs, in a break from past Republicans, and is currently slamming his rivals over possible cuts to the programs as he seeks the presidency again.All the while, the total amount of federal debt has more than doubled, to $31.4 trillion from just below $15 trillion in 2011. That growth has had no discernible effect on the performance of the economy. But it is projected to continue growing in the next decade, as retiring baby boomers draw more government benefits. The budget office estimated last month that debt held by the public would be nearly 20 percent larger in 2033, as a share of the economy, than it is today.Even under a generous score of the new agreement, which assumes Congress will effectively lock in two years of spending cuts over the full course of a decade, that growth will only fall by a few percentage points.Groups promoting debt reduction in Washington have celebrated the deal as a first step toward a larger compromise to reduce America’s reliance on borrowed money. But neither Mr. McCarthy nor Mr. Biden has shown any interest in what those groups want: a mix of significant cuts to retirement programs and increases in tax revenues.Mr. McCarthy suggested this week that he would soon form a bipartisan commission to scour the full federal budget “so we can find the waste and we can make the real decisions to really take care of this debt.”The 2011 debt deal produced a similar sort of commission, which issued recommendations on politically painful steps to reduce debt. Lawmakers discarded them. There’s no evidence they’d do anything else today. More