January 01, 2006
Government interest payments on the rise
Government interest payments are on their way up. Payments to non-residents are going up even faster.
There has been some discussion of the impact of household rising debt service on the macroeconomy. But government debt service is also increasing, as the outstanding debt in private hands and the level of interest rates continue to rise. In the blue line in the figure below, one can see that debt service, as a ratio of GDP, is still quite low relative to the highs of the early 1990's. (Note that the series ends in 2005q3, so it omits the effect of the most recent Fed Funds rate increases).
Source: BEA, December 21, 2005 release; Table 3.1. Note interest payments on all government debt, using NIPA definitions.
Perhaps more interesting is the fact that the share of interest payments has shot up to over one-third. This outcome is in line with the development that over half of the privately held U.S. Treasury debt is held by foreigners.
This trend probably has many implications, but the one I wish to focus on is the one relating to the net income balance of the current account. As I mentioned in my earlier earlier post, the net income category was barely in surplus in 2005q3, at half a billion (at seasonally adjusted annual rates). The rising interest rates over the last few months should make a surplus less likely in the fourth quarter. Given trends in government debt accumulation, absent large dollar declines, positive entries are even less likely going forward.
Posted by Menzie Chinn at January 1, 2006 10:08 PMdigg this | reddit
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the text under the red line is illegible,at least on my computer. Can you spell out what it says? thanks!
Posted by: jim miller at January 2, 2006 04:54 AM
I think I fixed this, Jim Miller. Menzie, we often need to delete the "width = height = " options on Movable Type.
Posted by: JDH at January 2, 2006 06:18 AM
Thanks jdh,now it reads ok.
So now I can make my comments.
First, the op refers to debt service but the chart refers to interest payments. In the civilian world "debt service" includes principal payments as well as interest. My guess is that the decline in interest payments largely reflects the decline in interest rates to historical lows. If we assume a more "normal" level of interest rates and further assume that principal re-payments based on a ten-year maturity are made,the tale would be very different,I think.
Second,the chart refers to "interest payments on all government debt". In my experience this usually includes state & local debt as well as Uncle Sam's. State and local debt numbers usually track economic developments because many political subdivisions have limitations on debt they can undertake based on tax revenues or assessed valuations. Uncle's debt will often reflect political decisions,such as funding the Iraq war. It would be interesting to see the same chart for uncle only.
I would guess that the numbers include State & local, because of the second point. Foreigners usually don't own municipal bonds because they don't benefit from the tax exemption. So it would be consistent that they own over half the Treasury debt but only collect 36% of total interest payments.
Posted by: jim miller at January 2, 2006 07:46 AM
The debt/GDP ratio has been increasing for the past few years and with interest rates rising, this trend will continue.
Posted by: pg; at January 2, 2006 07:58 AM
First, thanks to Jim Hamilton for remedying my deficiencies in using Movable Type. And thanks to all for the comments.
Second, I apologies to Jim Miller for confusing matters. The relevant lines in the Table 3.1 of the BEA table refers to specifically "interest payments", so I should not have thrown in the phrase about debt service. That being said, I still think it interesting that interest payments as a share of GDP are on the rise.
Third, Jim Miller is absolutely correct in reading the interest payment figures as pertaining to the consolidated government sector. That is how BEA reports them, and that is what I was attempting to convey by indicating the source and the notation to the Figure. It would be possible to get Treasury numbers, but then one would have to spend time to make sure the timing and the defnitions are harmonized between the Treasury numbers and the BEA numbers so that dividing one by the other makes sense. In this case, I just took the short cut of relying on BEA's numbers, taking into account the fact that the trends in this ratio over the past few years would be dominated by Federal interest payments.
Fourth, similarly, the sharp upswing in the ratio of payments to non-residents must almost assuredly be due to trends in payments on U.S. Treasury debt (which was my main point).
Posted by: menzie chinn at January 2, 2006 08:49 AM
Any particular reason that you used Table 3.1 instead of Table 3.2 ?
Posted by: Movie Guy at January 3, 2006 10:34 AM
Movie Guy: Good point. Could've done that. Turns out that Federal interest payments to non-residents and total government payments are reported as identical (although payments to residents are not). I'll have to check into that.
Posted by: menzie chinn at January 4, 2006 08:22 AM
Exactly what is the difference between Table 3.1 and Table 3.2? It is not just the sum of table 3.2 and table 3.3.
Posted by: Stormy at January 4, 2006 07:00 PM
Stormy: I spot-checked a couple entries for total government, Federal government and state/local government interest payments. The total payments do sum up. I don't know if the same holds true for the other entries.
Movie Guy: Apparently, there is no breakdwon for state/local interest payments into resident/non-resident recipients. This fact, combined with the identical entries in for total government payments to non-residents, and Federal government payments to non-residents, suggests that state/local payments to non-residents is small or essentially zero.
Posted by: menzie chinn at January 4, 2006 08:43 PM
You would think that Tables 3.2 and 3.3 would sum to Table 3.1, but I spot checked the current receipts for 2003 Q1--total was significantly off. 1433.1 + 1881.4 = 3314.5, where it should be 3001.3.
It really could be me; sometimes I have a hard time reading numbers.
Posted by: Stormy at January 4, 2006 09:57 PM
Stormy: I think to figure this out, I'd need to contact BEA. My only idea now is that the seasonally adjusted aggregate does not equal the sum of the seasonally adjusted components.
Posted by: menzie chinn at January 5, 2006 06:46 AM