May 26, 2022 - Economy & Business

How higher interest rates could upend future federal budgets

Data: Congressional Budget Office; Chart: Axios Visuals

Fresh projections from the Congressional Budget Office show that higher interest rates could put pressure not seen in years on lawmakers' spending plans.

Why it matters: As interest rates go up amid the Fed's aggressive campaign to tamp down inflation, the cost of federal interest payments is expected to rise substantially — giving more fuel to those who want to pull back on spending.

What they're saying: "Those are outlays that will soak up revenues, in a sense," CBO director Phillip Swagel said at a press conference yesterday.

  • "There are dollars going to that and not going to other uses, whether it be national security or education."

By the numbers: The CBO estimates the 10-year Treasury yield will average 2.9% in 2023, almost a full percentage point higher than its last forecast a year ago.

  • Interest costs will top $1 trillion by 2032, per the CBO's projections. That would be a record-shattering 3.3% of GDP — more than double its share this year.
  • The expected rise in rates accounts for about 70% of that growth in debt service costs over the next decade. The rest comes from annual deficits that are expected to add to debt levels.

The caveat: Over the past decade, the CBO consistently forecast higher interest rates that never materialized, so what’s penciled in now may not ever come to pass.

What to watch: "Even as we see interest rates going higher, we don't have recession in our forecast," says Swagel. "We don't have interest rates spiking in the way that might indicate the sort of sharp fiscal crunch. So this is a looming challenge, but we wouldn't say it's an immediate one."

Go deeper: CBO: Deficits are falling now, are set to soar later

Go deeper