The U.S. government’s spending on debt interest reached $659 billion this year, according to a Treasury report released on Friday. This significant increase in interest payments is due to the widening fiscal imbalance and the Federal Reserve’s rate hikes, which have escalated the cost of borrowing for the federal government.
As the federal government spends more than it collects in tax revenue, it issues new debt to cover its payment obligations. These debts accumulate interest over time, creating a growing cost for the government. Economists argue that these interest payments are economically wasteful, as the government could allocate the funds to more productive areas such as child care, education, and tax credits for families.
This year’s interest payments were nearly twice as much as two years ago, with $476 billion paid last year and $352 billion in 2021. Experts warn that if interest rates remain high, debt payments could become the second-largest federal program in the next three years, surpassing all other federal programs except for Social Security. Brian Riedl, a senior fellow at the Manhattan Institute, predicts that interest payments on the debt could reach $2 trillion per year by the end of the decade, consuming about 30 percent of all federal tax revenue.
The Congressional Budget Office projected that debt payments would cost around $5.4 trillion over the next decade in 2021, but that estimate rose to $10.6 trillion by May of this year. This expected increase in interest payments reflects the growth in the annual federal deficit, which unexpectedly jumped to approximately $2 trillion this year. This increase is surprising since deficits usually decrease during periods of economic growth.
Despite concerns over rising interest payments, some economists argue that the risks are overstated. The U.S. government continues to attract purchasers of its debt from around the world, and as inflation eases, the central bank is likely to lower interest rates. Interest payments on the debt are still relatively smaller compared to the GDP than in the 1990s.
However, other policy experts warn that the risks are real and growing. Rising interest payments can impact financial assets, including mortgage rates and corporate lending. If yields on Treasurys continue to rise, it could lead to further increases in mortgage rates, exacerbating the housing crisis and affecting other areas such as corporate financing.
Overall, the rising interest payments on U.S. debt highlight the need to address the growing fiscal imbalance and explore more sustainable methods to manage the national debt.
