In July, 2014 the Congressional Budget Office released its latest annual forecast on America’s economic future, “The 2014 Long Term Budget Outlook“.
Some key assumptions foretelling how high future interest rates will be on money the federal government, really the American tax payers, must pay are less than inspiring, in fact they are all bad news. These assumptions add to previous depressing CBO assumptions.
Per the CBO, four factors that will REDUCE future interest rates on $ borrowed by the Federal Government (the lower the better):
– The labor force is projected to grow much more slowly than in the past (1990-2007). (Slow labor growth means America’s ability to grow its tax base is weakened).
– The share of total income going to high income households will remain higher in the future (i.e. Fewer will share in the “American Dream”).
– Total factor productivity will grow slightly more slowly than in the past. (Less productive workers means less products and services).
– The risk-premium will probably remain higher than in the last few decades (i.e. Investors will find US Treasuries more attractive since they will be afraid of higher risk investments).
Per the CBO, four factors that will INCREASE future interest rates on $ borrowed by the Federal Government:
– Federal debt, unless things change, will be much larger relative to GDP than it was in the past. Click here for chart of America’s projected federal debt.
– Net inflows of capital will be less (i.e. There will be less foreign investment in the United States, which means less growth in businesses).
– The capital share of income will remain higher than historic averages (i.e. Those that have money to invest will keep more of the resulting income).
– The working population will get older, and have fewer people in their prime savings age (i.e. Less $ will be saved, and less $ will be available for investment).
This future isn’t set in stone, fixing it requires real leadership, a long-term commitment to smaller, less intrusive, and more effective government that stops excessive taxation of Americans. Upcoming posts will look at the details within CBO’s numbers.