Another offshoot of interest rate hikes - income on surpluses, and costs on deficits and debts.

I noted a recent article from longtime Capitol reporter Steven Walters, where Steve says that Wisconsin will see its already mind-bogglingly strong budget situation get a boost in another way - by drawing interest on all the cash that's currently in the state's bank account.

While news reports focused — correctly — on the department’s estimate that state government will end the current budget with a record $6.5 billion surplus on June 30, the agency also reported what interest alone will be earned on that much cash on hand.

Interest on that surplus cash will total $803.2 million over three years: $198.9 million in the year that ends on June 30; $327.4 million in the year that ends in mid-2024, and $276.9 million in the year ending in mid-2025, the department estimated.

So, while Democratic Gov. Tony Evers and Republicans who control the Legislature feud between February and July over how much to spend in the next budget, state government will be collecting $16.5 million a month in interest.

And that interest income is going to be even higher than we would have thought a few months ago, due to the Federal Reserve's sizable hike in rates during 2022. That income will be on top of any tax revenue growth that might happen over the next 30 months, and it's a pretty good win-win situation for the state's finances.

The flip side of that is that it becomes more expensive to borrow money. And due to the hikes from Jerome Powell and company, it makes it more expensive for the US to run deficits. This is starting to bear itself out as you read recent budget numbers from DC.

For example, the costs of interest on the debt will certainly be much higher than what was in the projections that the Congressional Budget Office made back in May. The net interest spent on the debt in Fiscal Year 2022 ended up well past the $399 billion that CBO estimated last Spring, and it isn't going to fall back to CBO's projection for FFY 2023.

Given that the cost of net interest on the debt in October-November 2022 ($90.3 million) is up more than 50% compared to October-November 2021 (just under $60.1 million), I'm not thinking that decline is happening. Those projections assumed the 10-year note would be 2.4% in Federal Fiscal Year 2022, and 2.9% in Federal Fiscal Year 2023 (which started on October 1). Today the 10-year is just below 3.7% and shorter-term treasuries are even higher.

The catch is that it is fine from a budgetary standpoint to run deficits in order to add back jobs and even to keep the economy growing, as long as rates stay low. But when rates go up and/or inflation stays high and becomes a bigger headwind on growth, then (and really only then) are deficits an economic problem. And it's the Fed's current insistence on fighting inflation (that's already going away) that is also raising interest costs on those deficits, which will give an excuse for GOPs in Congress to try to impose austerity that would stagger the economy ahead of the 2024 elections.

So along with the changes that are caused in individual economic activity due to the rise in interest rates, we're also going to see a budgetary effect from the Fed's actions. This is going to be helpful to the State of Wisconsin, who will gain funds on the huge amount of cash they have in the bank, but won't be good for the US Treasury or other governments that are borrowing to pay for things. And it's worth keeping in the back of your mind as rates are likely to stay elevated through at least the first part of 2023.