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Snapshot for March 8, 2006.

Soaring federal government payments to foreign lenders

A few decades ago, economic textbooks downplayed the modest growth of federal government debt as something that “we owe to ourselves.” At that time, virtually all interest payments by the federal government went to Americans.  In recent years, however, the federal debt has become increasingly financed by foreign lenders, both governments and private investors.  As a result, a rapidly rising share of our federal budget goes to interest payments to foreign lenders.

At the end of fiscal year 2001, the outstanding federal government debt totaled $3.3 trillion, 31% of it held by foreign lenders.  Over the succeeding four years, the debt grew by $1.3 trillion, but borrowing from abroad accounted for more than 80% of the increase.

Using Congressional Budget Office (CBO) projections for different scenarios, the Center on Budget and Policy Priorities estimates that the federal debt will rise to $6.7 trillion by 2011 under current policies.  If foreign lenders continue to buy 80% of new federal debt, the federal government will owe more than half—$3.8 trillion dollars—to foreign lenders by 2011, which is equivalent to 23% of expected gross domestic product that year.

Assuming that interest rates on federal debt remain as projected by the CBO (near 5%), we will be paying foreign lenders $181 billion in interest by 2011, up from $83 billion last fiscal year.  That growth contrasts sharply with the trend in the president’s budget for any non-defense discretionary spending program.  For example, President Bush’s budget calls for total spending on education, training, employment, and social services to remain at a flat $86 billion from 2007 through 2011.  Because of inflation, that represents a 10% cut in real spending over four years.  Because of rising enrollment, the cut per student or trainee would be even deeper than 10%.

This week’s Snapshot was written by EPI Research Director Lee Price.