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July 6, 2020 | International, Aerospace, Naval, Land, C4ISR, Security

Opinion: Why Interest On Federal Debt Matters For Defense

Byron Callan June 30, 2020

The COVID-19 pandemic has stoked consternation that U.S. defense spending is going to be significantly pressured in the 2020s. Congress will likely stick to the $740.5 billion defense discretionary top line agreed to in last year's budget deal for fiscal 2021. But the combination of trillions more in federal debt from higher spending and lower tax receipts this year and next and the probability that there will be future federal spending to better prepare for pandemics raise a higher probability of defense spending pressure.

“Flat” was already the new “up,” but “flat” now may be a budget that does not keep pace with annual inflation. The fears may be that defense spending will decline in the 2020s after a couple of good years of largesse from Congress and the White House.

Despite trillions in additional deficits and federal borrowing in 2020-21, there is one bright spot that indicates less dire defense spending pressures than now perceived—the interest on the federal debt.

U.S. federal debt is comprised of debt held by the public and intragovernmental debt, which is owned by different federal trust funds, the largest of which is Social Security. As of May, total debt held by the public was $19.8 trillion, and intragovernmental debt was another $6 trillion. Often, these two sums are lumped together, but they should be treated separately. The interest paid on debt held by the public is dispersed by the Treasury in the form of outlays to the owners of that debt. The interest paid on intragovernmental debt is, in essence, interest the federal government pays itself.

The Office of Management and Budget (OMB), in its annual projections of outlays, breaks out these two components of interest outlays to show net interest outlays. This is mandatory spending, and so it has been paid along with the other mandatory and discretionary funding the U.S. federal government provides.

One of the silver linings of the pandemic has been the Federal Reserve's aggressive lowering of interest rates. This makes federal debt more affordable, much in the way that a lower interest rate on a home mortgage can make a place to live more affordable.

The OMB projections released in February showed net interest outlays of $378 billion for fiscal 2021 rising to $665 billion by 2030. One could take issue with the deficit projections behind these outlay projects, as they may have rested on GDP growth expectations that were too optimistic and nondefense spending cuts that were not going to be realized. However, dividing interest outlays on debt held by the public by debt projections implied an interest rate of 3% or more over the forecast period.

The pandemic has trashed those rate projections. Federal debt held by the public is offered in different maturities. Treasury bills, which mature in a year or less as of May, were 23% of the total debt held by the public. Treasury notes that mature in 1-10 years were 51%, and bonds that mature in 10-30 years were 12%. (There is another 10% of other Treasury instruments.)

Rates now are much lower, although clearly that would only matter for new debt that is issued by the Treasury. The rate on a 90-day Treasury bill is currently 0.13%. On a five-year note, it is 0.33%, and on the 10-year note, 0.69%. The 30-year note rate is 1.4%.

This implies that interest outlay projections should be declining, although new projections may have to wait until the White House releases its 2022 fiscal budget request and out-year projections, presumably in February-March 2021. Net interest outlays could be at least $100 billion less in 2022-23 than the February 2020 projections on higher debt but lower rates.

In the scheme of total federal outlays, which the OMB projected to be $4.8 trillion for 2021, $100 billion is not a lot, but it indicates there is a bit more headroom for defense spending and other nondefense discretionary spending than a focus on federal debt alone might suggest. Federal infrastructure spending could be one area of more traction in the 2020s, and the issue of social justice may also spur more demand for federal resources.

One outcome of the pandemic, however, will be to make defense expectations more sensitive to interest rate expectations. It is not too difficult to project scenarios with rising debt and interest rates that increase to more “normal” levels. The pandemic also underscores that the unthinkable should be given a bit more room on long-term projections. It is quite conceivable that a major military conflict, a massive natural disaster or another economic contraction could further add to federal debt in the 2020s.

https://aviationweek.com/defense-space/budget-policy-operations/opinion-why-interest-federal-debt-matters-defense

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    By: Sebastian Sprenger COLOGNE, Germany — The European Union should prepare for the possibility of a gradual disengagement by the United States from the continent, even if Democratic challenger Joe Biden beats President Donald Trump in the November election, according to Germany's defense minister. Speaking before the European parliament on Tuesday, Annegret Kramp-Karrenbauer said she believes only the “tone” in trans-Atlantic relations would change following a Biden win. The reorientation of America's foreign policy toward China as a global rival would remain a key driving force in Washington, possibly at the expense of Europe, she said. “If that is the case, it means we Europeans must become able to act more so than is the case today,“ she said in testimony meant to lay out Germany's defense agenda during a six-month turn at the helm of the European Council of the EU that began July 1. 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An EU-wide threat assessment is the first step in that process, overseen by the EU Intelligence and Situation Centre and supported by member nations‘ intelligence services, she said. The assessment is slated to be “far along“ and will ideally be finished by the end of the year, when Germany hands the presidency baton to Slovenia, Kramp-Karrenbauer said. Also needed is a bloc-wide “operational understanding“ for whenever there is actual fighting to be done, according to the defense minister. Even peacekeeping and training missions, which tend to dominate the EU mission roster, always come with more kinetic, force-protection elements, for example, and there should be a process in place for setting up those types of operations, she argued. “You could approach it with the idea that this would fall to the same few countries in Europe, or you could develop a method as part of the strategic compass that this would become a matter for all members,“ Kramp-Karrenbauer said. West Africa could be a first test case of waning U.S. concerns about European interests. An American counterterrorism mission there has been crucial in supporting a U.N. peacekeeping force of EU and African troops. European leaders consider the region a hotbed for terrorism, fearing the possibility of fighters making their way to Europe. But the mission is controversial in the United States, and an American withdrawal could be in the offing at some point, Kramp-Karrenbauer said. “That is a scenario that we could find ourselves confronted with in the future.“ There is also the question of a withdrawal of almost 10,000 U.S. forces from Germany, the details of which are still somewhat shrouded in mystery. Hashed out by Trump and a small circle of White House advisers, military leaders are still figuring out the details for implementing the decision, Army Secretary Ryan McCarthy said in a phone call with reporters Wednesday. McCarthy said he discussed the matter with U.S. Air Force Gen. 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Fears of an increasingly belligerent Russia and Trump's overt questioning of international alliances as key to keeping the peace have driven a wave of increased defense spending on the continent in recent years. “The things that Europe needs to do for its own security are precisely the things that improve the trans-Atlantic security relationship,“ Rathke said. When it comes to Washington's focus on China versus Europe, paying attention to different regions of the world should be possible simultaneously, he argued. “This is not an either-or situation. That's not how the United States should look at it.“ https://www.defensenews.com/global/europe/2020/07/15/germany-sets-up-a-european-defense-agenda-with-a-waning-us-footprint-in-mind/

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