The Washington political establishment, the social-media pundits, and the editorial pages of many newspapers have all been warning of a fiscal Armageddon if the national debt limit is not raised in the very near future. The danger, it is said, is that the U.S. government might default on its interest payments, sending the domestic economy and the international financial markets into a dangerous tailspin.
The federal government reached the current statutory limit on the national debt of $31.4 trillion earlier in 2023. Treasury Secretary Janet Yellen informed the public and the politicians in Congress at that time that the same financial gimmickry that has been used in the past would be applied again. Funds would be shifted around and juggled on the federal government’s ledger books to forestall running out of money to spend on mandatory (“entitlement”) programs as well as all discretionary expenditures, along with interest payments on the federal debt, hopefully, until the late summer, or maybe even into September. But in a new, revised estimate, Yellen said more recently that the “hard” ceiling on any further spending could be reached by as early as June 1, 2023.
Taxes collected can cover debt and entitlement payments
The impression created in the public’s mind is that come June 1 or some later date in the summer, interest payments on the federal debt will not be able to be made unless the debt ceiling is raised. This is false. The federal government has funds to meet both its interest payments and the expenditures on the leading entitlement programs. What it would not have is the needed funds to cover defense spending and other items listed under the general heading of discretionary expenditures.
The federal government’s fiscal year runs from October 1 to September 30. Every month the Congressional Budget Office (CBO) issues a Monthly Budget Review summarizing where the government stands in terms of revenues and expenditures, so far, for the fiscal year. Its April 10, 2023, report covered the first six months of the current fiscal year, from October 2022 through March 2023.
During this half-year, Uncle Sam took in from all taxable sources a total of $2.049 trillion, and had total outlays of $3.147 trillion, resulting in a budget deficit of $1.099 trillion. Expenditures on the largest “mandatory” spending programs – Social Security and Medicare-Medicaid – came to $1.365 trillion during this period. Net interest on the government debt came to a total of $308 billion between October and March.
This meant that, on average, the federal government was spending $227.5 billion each month on the “entitlement” programs and $51.3 billion on interest payments to those holding the public debt. Combining them, these two categories of government outlays averaged $278.8 billion per month for the first six months of the current fiscal year. At the same time, the government was bringing in $341.5 billion in tax revenues, on average, for each of these last six months.
Actual monthly government receipts and expenditures, of course, do not exactly equal such calculated monthly averages. But nonetheless, it is clear that given the revenue and expenditure patterns of the federal government, it can safely be presumed that the U.S. Treasury will take in enough tax revenues from its various sources a sum in June and after that is more than sufficient to meet its interest payments on the national debt and meet all of its expenditures for Social Security and Medicare-Medicaid. Even if we round up interest payments to $60 billion for the month of June, from the last six-month average of $51.3 billion, Janet Yellen will have more than enough tax revenues to assure that “America” does not default or fall behind in paying the government’s creditors on a timely basis.
Higher taxes needed if discretionary spending to be covered
What could not be fully covered would be all government spending that is usually placed under the “discretionary” category, including Defense Department expenditures. During the first six months of the current fiscal year, federal “discretionary” spending came to $1.782 trillion, or a monthly average of $297 billion. Defense spending during this half-year period totaled $385 billion, or $64.2 billion per month of these discretionary outlays. This is what would not be able to be fully paid out of tax revenues in June or some later month if the national debt ceiling is not raised.
A little less than $300 billion a month, on average, is what government is spending beyond average monthly tax receipts. There are about 176.2 million households in the United States liable to submit tax returns. If the debt ceiling was not to be raised, but all current government expenditures were to continue to be paid out in the amounts spent during the first six months of the federal government’s current fiscal year, each of these households would have to be taxed, every month, an additional $1,702. But considering that only about 150 million households actually filed tax returns in the last fully recorded year, this means that each of those households would have to be additionally taxed closer to $2,000 more per month.
This is the real reason politicians in Washington, D.C., are in a panic, along with social-media pundits and so many writers on the opinion pages of the leading newspapers in the country. If the debt ceiling is not raised, and if taxes are not increased by around $300 billion a month, after all the Treasury bookkeeping gimmickry comes to an end, then this is the amount of government spending that will have to be cut in one way or another, if interest payments on the debt are to be fully paid on time and entitlement programs are not to be touched, as virtually all those in Congress insist, regardless of their party label.
After all, if the debt limit is not increased, then from some date not too far off, the United States government will, in fact, be operating on the basis of a balanced budget. The federal government could roll over existing debt as outstanding maturity dates arrive, though with higher interest rates to be paid on any such rolled-over debt, the amount of principle that could be borrowed in place of the old debt instrument would have to be less if the amount of federal tax dollars allocated to meet interest payments were to stay more or less then same.
All that has been said, so far, has been separate from the wider and more fundamental question of, what is it that government should be spending money on? But before that question could be asked, it was important to highlight and emphasize that the U.S. government need not default on any interest payments coming due out of current levels of tax revenues. Nor even the current levels of spending on the “sacrosanct” entitlement programs of Social Security and Medicare-Medicaid need be cut. Anyone suggesting otherwise is making statements either out of ignorance about the fiscal reality of what government takes in in taxes and pays out as expenditures, or are demagogic scare-tactics meant to frighten the American people into thinking that the country is about to go over a fiscal cliff that would threaten the stability of the national and global financial markets.
The real fiscal crisis concerns the role of government in society
There is a fiscal crisis facing the United States. It arises from the fact that government’s size and scope reach far beyond the original conception of the role of government in society as envisioned in either the Declaration of Independence or the U.S. Constitution. For the Founding Fathers, government was an unfortunate necessity, given that men were too frequently tempted to plunder their neighbors. The role of government was to secure each and every individual in his respective rights to life, liberty, and honestly acquired property. This was the reason for police, courts, and national defense, since pillagers and plunders can be either domestic or foreign.
Almost all other matters were to be left to the free and voluntary choices and associations among the citizens themselves. Practically all the community and related issues that today go under the heading of “social problems” of one type or another were expected to be effectively handled by “civil society,” that is, the networks of voluntary association and mutual assistance that individuals take on themselves to solve or ameliorate common concerns with their fellow men. Charity, public works, support for the those who fell onto hard times or family tragedies, were considered to be part of this arena of civil society
But over the last one hundred years, the alternative philosophy of political paternalism has replaced this earlier conception of free men in a free society, finding methods of free association to deal with the various circumstances of the human condition. Every extension of government in these directions reduces personal and interpersonal responsibility, narrows the remaining avenues for individual choice and free association, and increases the costs of government.
Every dollar more in taxes to cover the expanded range of government intrusions and interventions into the affairs of men, means one dollar less in the pockets of the citizenry. For the citizen-taxpayer, the growth of government confronts him with a clear and present trade-off: either more of what he has honestly earned remains in his own pocket to use as he finds it most desirable and appropriate, or that dollar passes to the government with those in political power now determining on whom and what for that dollar is spent.
With every dollar more taxed away, the (marginal) cost of bigger government rises because it requires some increasingly more valued private use for that dollar having to be forgone. At some point, the tax burden and the private alternatives forced to be forgone become great enough that the citizen-taxpayer in his role as voter decides that, perhaps, it is time to “throw the rascals out.”
Deficit spending as the political path of least resistance
How much easier and less threatening to the office holder’s political future if he can attract campaign contributions and sufficient votes on election day to win election and reelection by offering various constituent groups government-provided benefits in the forms of welfare redistributions, business subsidies, government contracts, and a host of other such monies without having to tell what the full cost of it all really is or who, in the here and now, would have to be taxed to pay for it all.
Far better to give the impression that all or a good part of it is either “free” or provided at a great discount in terms of the tax burden imposed to provide it by, instead, borrowing increasingly larger and larger sums to cover the actual expenses. This is how we have gotten into the fiscal mess we now face. By not raising the debt limit and forcing the federal government to have to stay within its tax-limiting means, the illusion of something for nothing finally vanishes. Reality reasserts itself: there are no free lunches.
Chances are, from the experience of the last one hundred years, history will likely repeat itself. The members of both major political parties in Congress, in conjunction with the president in the White House, will cut some deal. The debt limit will be increased, some rhetoric or token pretense of handling out-of-control government will be promised for some time in the future, and the national debt will be on its way to be even larger this year and next year and beyond.
But at some point, sooner or later, the reality of government spending getting past any fiscally manageable limit will be reached. When that point comes not only will the reality of government being unable to actually fulfill all its spending promises finally arrive. It will be necessary for the American people to ask themselves what is it that government can and should do, and at what cost in terms of both tax dollars paid and lost personal freedom of choice over their own lives? The political fight over this will, most assuredly, not be a pretty sight to see.
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