Will Higher Interest Rates Impact the Federal Budget and Federal Workers?

By on April 1, 2016 in Pay & Benefits with 31 Comments

Wealth Cash Money

The amount of money taken in for taxes by the federal government is growing and the IRS is setting records for tax money collected. That sounds good for the federal workforce. If there is more money coming into the Treasury, there may be more money available to agencies to spend and pay and benefits for the federal workforce may go up.

Unfortunately, this is not actually the case because the size of the federal debt is also going up each year despite the increase in revenue. Total federal debt at the end of 2016 is projected to be about $19.3 trillion. The reason is simple: government spending is going up faster than its revenue. This debt total does not include debt of state and local governments or the “unfunded liabilities” of federal programs such as Social Security and Medicare.

The federal debt total represents all the federal government’s borrowing in past years. The total federal debt is now larger as a percentage of the U.S. economy than at any time in our history with the exception of World War II.

The government has yet to feel the full impact of this deficit spending. The Department of the Treasury still is able to borrow a few billion dollars every day while paying low interest rates. The interest rate on a 10 year Treasury bill is still very low. Check out the G fund interest rate for 2015: It was 2.04%.  The longer term average is closer to 6% than it is to 2%. In the past 214 years, interest rates have only been this low around the time of the depression in the 1930’s and World War II.

In other words, we can expect interest rates to go up. Without new legislation to raise taxes or to reduce federal spending, interest on the federal debt will eat up more than 13% of all federal outlays in 2026 according to the Congressional Budget Office (CBO).

The federal government owes a very large amount of money. Interest rates are likely to go up since the current rates are very low by historical standards. The CBO estimates interest rates will be going above 4% over the next 10 years. When interest rates go up, the amount of interest to be paid each year will also go up. Presumably, the federal government will also continue to borrow more money to pay current expenses. The CBO projections differ somewhat from the Administration’s estimates.

13% of the federal budget may not sound like a big number. But, according to the Wall Street Journal, this amount is “more than the White House projects for annually appropriated spending in 2026 by all government agencies combined outside of the Pentagon.”

No one knows what will transpire in Congress or in future elections. Regardless of which party may control the Administration or Congress over the next few years, dealing with the debt will become a bigger issue.

The impact on the federal workforce is likely to be significant. Federal employee unions may correctly assert that the federal workforce has borne the brunt of financial sacrifices in the last few years and that federal employees are entitled to a large pay raise. Perhaps that will work in coming months. In the longer term, that argument is not likely to convince Congress or the Administration that large pay increases or significant increases in employee benefits are justified as interest payments on the federal debt take up a larger portion of the budget.

Our economy has been growing at an anemic rate. If an economic recovery does take hold, federal spending decreases, and tax revenue goes up as income and company profits go up as a result of a rapidly growing economy, perhaps we may grow our way out of an impending dilemma.

As suggested by an English proverb: “Hope for the best but prepare for the worst.”

© 2016 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.

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About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources.

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