A spike in interest payments on the federal debt
The federal budget deficit was $682 billion for the first 10 months of fiscal year 2018, CBO estimates, $116 billion more than the shortfall recorded during the same period last year. Revenues and outlays were 1 percent and 4 percent higher, respectively, than in the same period in fiscal year 2017.
What is driving the deficit's growth? Spending, of course. The CBO says government receipts grew 1 percent over the first 10 months of the fiscal year, but spending grew 4 percent. The CBO looked deeper to see where the money was going:
The largest increases were in the following categories:
In total, spending for the three largest mandatory programs increased by 4 percent:
Outlays for Social Security benefits rose by $34 billion (or 4 percent), because of increases both in the number of beneficiaries and in the average benefit payment.
Medicare spending increased by $15 billion (or 3 percent) because of increases both in the number of beneficiaries and in the amount and cost of services. The increase in spending was partly offset because reconciliation payments typically made to Medicare Advantage plans in July were accelerated to June this year. Reconciliation payments are made annually to account for unanticipated spending increases in the previous calendar year.
Medicaid outlays rose by $10 billion (or 3 percent), largely because new enrollees were added through expansions of coverage authorized by the Affordable Care Act.
Outlays for net interest on the public debt increased by $48 billion (or 19 percent), partly because of a higher rate of inflation. To account for inflation, the Treasury Department adjusts the principal of its inflation-protected securities each month by using the change in the consumer price index for all urban consumers that was recorded two months earlier. That adjustment was $33 billion in the first 10 months of fiscal year 2017 but $57 billion so far in the current fiscal year. The remaining increase reflects higher interest rates and larger debt in the first 10 months of 2018.
The government received $22 billion less in total payments from Fannie Mae and Freddie Mac, resulting in higher outlays (included in “Other” in the table below).
Outlays of the Department of Homeland Security (included in “Other” below), increased by $19 billion (or 49 percent), largely because of activities related to disaster relief.
We were particularly interested in the rise in interest payments on the federal debt. With inflation slowly coming back to life, interest rates rise and thus increasing federal spending. This is a number to watch closely in the months ahead. If inflation accelerates, rates will rise even more. That will pile on even more red ink.
What the nation needs -- desperately -- is fiscal discipline. Neither political party seems interested in such restraint, particularly in an election year. The obvious question is when will they tap the spending brakes? And if Congress refuses, will the market do it for them -- and do so in a much more abrupt fashion?