Yellen: Balanced Budget Unnecessary to Create Fiscal Sustainability

Secretary of the Treasury Janet Yellen speaks in New York, on Sept. 20, 2023. Julia Nikhinson/AP Photo

The federal government does not need to balance the budget to ensure the United States is on a fiscally sustainable path, Treasury Secretary Janet Yellen said to lawmakers.

Appearing before the House Financial Services Committee on Jan. 6, Ms. Yellen was asked if the U.S. budget would ever be balanced over the next 50 years to ensure the country is on proper financial footing.

“I don’t think the budget needs to be balanced,” she said during an exchange with Rep. Pete Sessions (R-Texas). “The U.S. budget does not need to be balanced to be on a fiscally sustainable path.”

Ms. Yellen added that President Joe Biden’s deficit-reduction economic policy proposals would help “guarantee” the government is on a sustainable path by ensuring the national economy is growing.

Mr. Sessions also took a trip down memory lane to quote former House Budget Committee Chair John Yarmuth (D-Ky.), who contended that the U.S. government never has to pay off the national debt.

“We don’t need to find ways to take money from people to pay for what we need to do in this country. Because we issue our own currency, because we borrow and spend in our own currency, we can pay for whatever we want to pay for,” Mr. Yarmuth said at a Kentucky Rotary Club event in Louisville in June 2021.

Balanced Budget Talk

House Republicans released a budget blueprint in September, pledging to balance the books in a decade through reductions in discretionary spending, restrictions on social expenditures, and rosy economic growth forecasts.

Democrats in the lower chamber opposed the proposal, accusing it of pretending to resolve the imbalance “by relying on apocalyptic cuts and budget gimmicks.”

In a letter to Sens. Sheldon Whitehouse (D-R.I.) and Ron Wyden (D-Oregon), the Congressional Budget Office (CBO) released a list of tactics that could be employed to bring the budget into balance by 2033. This included gradually reducing non-interest spending this year that would diminish federal borrowing and “push down interest rates and thus increase private investment in capital, causing output to be higher than it would be otherwise.”

Congress has also inched toward establishing a bipartisan commission to address the ballooning national debt, which presently stands at $34.147 trillion.

In the fiscal year 2024 budget, the White House projected approximately $17 trillion in cumulative deficits by 2033.

In addition, the nonpartisan budget watchdog predicted that the deficit as a share of the gross domestic product would reach 10 percent by 2053, fueled by “faster growth in spending than in revenues.”

Borrowing Trends

Discussing the latest annual Financial Stability Oversight Council (FSOC) report that assessed the risks of higher interest rates, Mr. Sessions noted that the Treasury is flooding the financial markets with government bonds, meaning local banks are allocating less capital to issue small business loans, mortgages, and agricultural financial products.

The Treasury is shifting trillions of dollars from where it had been to address “the risks that our debt now poses to the United States,” Mr. Sessions explained.

“I agree with you,” Ms. Yellen replied.

House Rules Committee Chairman Pete Sessions (R-Texas) (L), with Rep. Virginia Foxx (R-N.C.) (R), confers with staff at the Capitol in Washington, D.C., on Dec. 16, 2015. AP/J. Scott Applewhite

According to the Monthly Treasury Statement, the federal government is already facing a budget shortfall of $510 billion in the first three months of the currency fiscal year. Washington also spent $180 billion on interest payments in December alone. This included gross interest on Treasury debt securities and net interest on interest paid to debt holders.

In its initial fourth-quarter GDP estimate, the Bureau of Economic Analysis (BEA) reported that the cost of covering the gross interest on the national debt is north of $1 trillion.

“All these political games and bungling all but ensured the national debt would grow into a fiscal time bomb. When interest rates began rising to combat inflation, the fiscal time bomb started to detonate,” said Crag Eyermann, a research fellow at the Independent Institute, in a report. “The consequence is the exploding growth of the U.S. government’s cost of interest on the national debt.”

The Treasury has accelerated borrowing over the past year to help manage these ballooning deficits and growing interest costs.

In a series of announcements late last month, the Treasury unveiled plans to borrow about $750 billion in the January to March quarter of fiscal year 2024. Officials also predicted that the Treasury will borrow a little more than $200 billion in the April–June quarter, “assuming an end-of-June cash balance of $750 billion.”

Moreover, the Treasury intends to hold some of the largest-ever debt auctions to help plug the massive budget shortfalls.

Over the next three months, the Treasury will boost the size of auctions to refund about $105 billion of privately held Treasury notes maturing on Feb. 15. It is estimated that these efforts will generate close to $16 billion in new cash.

The assistant secretary for financial markets, Josh Frost, says the borrowing binge will likely subside over the next year.

“Based on current projected borrowing needs, Treasury does not anticipate needing to make any further increases in nominal coupon or FRN [floating rate notes] auction sizes, beyond those being announced today, for at least the next several quarters,” Mr. Frost said in a statement.

A Fresh Concern for Voters

Last month, a Main Street Economics poll found that 91 percent of U.S. voters say neglecting to tackle the national debt will have long-lasting financial effects on their lives.

Should elected officials fail to resolve the country’s debt challenges, 84 percent believe interest rates will continue to climb.

“As our national political leaders take the initial steps to tackle this issue, having a benchmark to measure the sentiment of American voters is an essential and invaluable tool,” said Les Rubin, founder and CEO of Main Street Economics, in a statement. “It is clear that our out-of-control spending and $34 trillion of debt is a major concern to our citizens.”

During a Feb. 4 interview with CBS’s “60 Minutes,” Federal Reserve Chair Jerome Powell urged policymakers to begin addressing the $34 trillion national debt.

While the coronavirus pandemic was a “special event” that forced the government to spend to avert disaster,” Mr. Powell believes it is crucial to start tackling the subject because it is a long-term threat to the economy.

“It’s probably time, or past time, to get back to an adult conversation among elected officials about getting the federal government back on a sustainable fiscal path,” the Fed chief stated, adding that “sooner’s better than later.”