WASHINGTON – President Bush and lawmakers from both parties are pledging record reconstruction spending in the wake of Hurricane Katrina, estimated as high as $200 billion. That’s certain to add to a mushrooming national debt that already has the country dependent on foreign investors.
The $200 billion is about equal to what’s been spent so far on the wars in Iraq and Afghanistan. It’s almost half the size of this year’s domestic discretionary spending, essentially everything the government does besides national defense, Social Security, Medicare and Medicaid.
Bush vowed Friday to rebuild the tattered Gulf Coast, “whatever it costs.” He ruled out tax hikes, which means the new spending must add to the federal budget deficit, now $331 billion, and the national debt, now $4.6 trillion.
Economists say that even a $500 billion federal deficit won’t injure the economy in the short term. It will stimulate growth, in fact. But it will have costs, both short term and long.
Each year’s deficit spending adds to the federal debt, which is passed on to future generations. The net national debt has risen from $3.4 trillion to $4.6 trillion under Bush.
Taxpayers will pay about $208 billion for the fiscal year starting Oct. 1 simply to cover interest costs on that debt. That’s more than 25 times next year’s $8.2 billion budget for the Environmental Protection Agency, illustrating that exploding deficits impose large costs on today’s taxpayers. The money for interest payments on the debt goes to investors in Treasury bonds, such as the Chinese government. Foreigners now hold 46 percent of the Treasury’s debt.
Increasingly, financing the federal deficit depends in part on the kindness of foreigners, because they determine the demand for Treasury bonds. If these nations sour on U.S. treasuries, interest rates would have to rise to keep investment coming in.
Asked on Friday about the impact of rising deficits and debt on tomorrow’s taxpayers, Bush called on Congress to make some offsetting cuts in spending on other things. He didn’t specify what.
With Bush and the Republicans who control Congress dead-set against raising taxes, and with history showing that Congress is highly unlikely to cut existing programs anywhere near $200 billion, most if not all of Katrina’s cost will add to the deficit. And that spells trouble down the road.
“I think the short answer is it is going to make the budget situation even worse, and the way we’re going to pay for it is borrow the money,” said Robert Bixby, the executive director of the Concord Coalition, a bipartisan group that advocates fiscal responsibility.
Adding to the debt is particularly risky because it complicates a grim scenario that’s just around the bend. In 2011, the first wave of the baby boom generation will turn 65. For the two decades that follow, budget experts warn, there’ll be unprecedented strain on government spending for retirement and health care programs.
“We’re on the verge of a huge national expense, and we have no idea how to pay for that,” Bixby said. “The danger here is that we’re simply making that problem even worse by entering it with the budget so deeply in deficit.”