In debt we trust
View(s):Spending some time, I browsed the Internet sites to find out the annual debt service costs of the US. These costs should include payments of both interest cost and principal or “amortisation payments” as we used to call it. Principal of a loan refers to the amount borrowed, which the borrower must pay back in instalments. Surprisingly, I was unable to find statistical data for the annual repayment of the principal costs.
Sri Lankan farmers are eternally in debt
Assistance from AI
Before giving up the effort, I posed the question to the AI (artificial intelligence) Assistant who can respond to such inquiries in human-like languages in few seconds. It is amazing to find such information in a few seconds at your fingertip for otherwise you and I as humans must spend so much time searching the libraries and browsing the Internet.
The AI answer was interesting: “Finding specific historical data on principal payments for US debt can be challenging because the US Treasury typically manages debt by rolling over maturing debt rather than making principal repayments.” This means that the US government keeps borrowing constantly to pay off maturing old debt.
Finally, with the help of the AI Assistant, I was able to find an estimated principal payment of approximately $7.6 trillion maturing debt in 2024. Apparently, this principal payment together with due interest costs is much larger than the government’s annual tax revenue. Therefore, rolling over is necessary!
Debt snowball
The last fiscal year of the US just ended in September 2024. According to the Budget 2024, total revenue was $4.39 trillion and the total expenditure $6.29 trillion; accordingly, it also gives a staggering budget deficit of $1.90 trillion.
The budget deficit needs to be financed through further borrowings in addition to the cost of ‘rolling over’ the previous borrowings. Accordingly, debt is getting piled up annually with snowball effects.
Total public debt of the US government has now reached $35 trillion, which was about one-fifth of that some 20 years ago. Last year 2023, US public debt accounted for 122 per cent of GDP, which was less than half of that in 2004.
There are only a few days for US citizens to vote for their new President, while election campaigns are usually elaborated with election promises too. Both Presidential candidates, Kamala Harris and Donald Trump have revealed what they were going to do after winning the elections.
According to a recent report of the Committee for a Responsible Federal Budget, Harris’ plan would boost the US public debt by $3.5 trillion over the next decade, while Trump’s platform would cause it to spike by $7.5 trillion.
Debt problem, flipped over
At the time that we began to learn about economic development in the world, “debt” was considered to be a symptom of “underdevelopment” in developing countries. It was heavily associated with developing countries, which had faced large external debt crises, rising oil and food prices and declining terms of trade against their primary exports.
The debt crises in the 1980s have also led to the so-called “structural adjustment programmes” in developing countries supported by the international organisations such as the World Bank and the IMF.
Today, although many developing countries suffer from debt distress, generally the debt problem has flipped over. Advanced countries such as the US, UK, Japan and many EU countries, hold much larger amounts of world debt. The difference is, however, that public debt in advanced countries is in their own currency which has an international value.
The US does not have to worry about its piling up debt, “at least temporarily”, because there is global demand for US debt issued in terms of Treasury Securities. For historical reasons, the US dollar has acquired the most prominent international currency status, which was also legitimised at the 1944 Bretten Woods agreement.
International reserves
As per the IMF data, international reserves held by the central banks all around the world amounts to $11.5 trillion – of course, less than one-third of US public debt. Nearly 60 per cent of this is in US dollars, and another 20 per cent in Euro. The balance is divided among Japanese yen, British pound, Canadian dollar, Australian dollar, Chinese yuan and others.
While all the countries in the world keep their international reserves mostly in US Treasury securities, Japan, China and UK are the top-three countries holding its largest portion amounting to over $2.6 trillion. As world trade and international finance have been growing, the demand for the US dollar as the major reserve currency has been on the rise.
The US too, does not have to ‘print money’ to pay off maturing debt, but need to roll over it by issuing new debt and paying old debt. But public debt is piling up. “Will it get piled up infinitely” is a million-dollar question, for economists to ponder!
Future generations
There is one thing clear, at least until we come closer to that infinite time: Let’s look at the other side of the story to understand how to pay off the rising debt, which cannot be left unattended. The only way to pay off public debt is through tax money so that we must also tax the people increasingly.
Apparently, this is not a politically correct answer. That is exactly, why ‘rolling over’ has become a politically acceptable answer. However, this means that it is not those who borrow who must pay it; it is their future generations who should bear its burden.
If a country had borrowed and invested in income-generating activities, then the future generations will also earn and pay it. But if the country has borrowed in financing recurrent expenditure – salaries, interest costs, welfare and maintenance, then the future generations must find the way to earn incomes on their own and pay off past debt too.
By the way, there is another way – default! The US Congress has imposed “debt ceiling” to limit borrowings. However, the US government has often raised or suspended this debt ceiling to prevent default on its forthcoming debt obligations. In the recent past, Congress raised the debt ceiling by $2.5 trillion increasing its borrowing limit to $31.4 trillion. In October 2023, Congress suspended the debt ceiling until 2025.
In Sri Lanka
In Sri Lanka, public debt which has both internal and external components is a different story. We also do ‘rolling over’ by issuing government securities constantly and its Treasury Bills’ issuance every week. Apart from meeting the maturing old debt must be paid off, the cash flow of the Treasury must be maintained too.
Apart from the average monthly interest cost, which is about Rs. 250 billion, government salaries should be paid on the 25th day of the month, pensions on the 10th day of the month, and subsidies on the 15th day of the month. We must also add about Rs. 150 billion amortisation payments. Altogether, these expenses account for a colossal amount closer to Rs. 550 billion, compared with the monthly revenue of about half of that.
Accordingly, Sri Lanka must continue to issue government securities and borrow to keep the cash flow, while attempting to improve the debt sustainability targets with the IMF programme. Sri Lanka can bring it under control with fiscal consolidation and the improvement in its primary balance.
Along with maturing external debt in the coming years, Sri Lanka has another issue to be dealt with. External debt should be paid off in foreign currency, mainly in US dollars. The US can print the dollars, but Sri Lanka must earn the dollars.
(The writer is Emeritus Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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