Interest Rates and the Budget Outlook

Paul Krugman, NYT
April 14, 2014, 6:18 pm

The CBO has issued its latest budget update, and as always it’s a very careful piece of work. But there is one thing really worth drawing attention to — not that the CBO is necessarily wrong, but it might be, and at any rate people should be aware of what’s driving the conclusions.

Here it is: the CBO’s projection has deficits quite low in the near term, but starting to widen a few years from now. What’s driving that move toward deficit? To an important extent it’s interest payments, which CBO has rising from 1.3% of GDP in 2014 to 3.3% of GDP in 2024.

Well, that’s what happens when you have ever-growing debt, right? The more you owe, the bigger the interest payments, and up it spirals, right?

Wrong.

(More here.)