Wednesday, April 13, 2011

The Great Budget Deal, Part 2

The Great Budget Deal of April 2011 promises $38.5 billion in spending cuts for the balance of Fiscal Year 2011-12.  We’ll see if the reductions materialize.

The deficit for the current fiscal year is estimated around $1.4 trillion dollars, which must be met with net new Treasury borrowing.  The Treasury auction schedule for 2011 reveals a mix of durations, from 4-week bills to 30-year bonds.  The schedule does not indicate the amounts of funds to be borrowed at each auction, so there is no way to estimate the interest cost of the current fiscal year’s borrowing.

How much interest will the Treasury have to pay on the current fiscal year’s net new borrowing of $1.4 trillion to finance the budget deficit.  At 1%, the cost is $14 billion.  At 2%, it is $28 billion, and so on.  Interest rates have fluctuated for the 5-, 7-, 10-, and 30-year notes and bonds in the past six months, which makes new borrowing costs difficult to forecast.

In 2010, net federal interest outlays totaled $197 billion.  Federal debt held by the public (excluding Social Security and Medicare) totaled $9 trillion.  Each trillion in debt averaged $21.9 billion in interest outlays.  On this ratio, assuming no change in interest rates throughout  2011, the $1.4 trillion deficit would entail $30.7 billion in additional interest.\, vitiating most of the spending cuts in the Great Budget Deal.  Big Deal!

No comments :