Feb 8, 2024 - Economy

The cost of interest on U.S. debt is soaring

Data: Congressional Budget Office; Chart: Axios Visuals
Data: Congressional Budget Office; Chart: Axios Visuals

The U.S. government's debt is on track to rise to $54 trillion over the next decade, according to the Congressional Budget Office.

The big picture: Raw numbers don't tell you much about whether a given level of debt is burdensome or not. The rubber-meets-road test of sustainability is how much of the nation's resources go to service that debt every year — and the news is gloomy.

Why it matters: The U.S. government is on track to face debt service costs that, starting in 2026, will be a modern record as a share of the economy — and they are forecast to rise from there, pinching other national priorities.

  • The government already spends more money servicing the national debt than it does on Medicaid, and the number is on track to surpass defense spending soon.

By the numbers: Debt service costs were 1.2% of GDP as recently as the mid-2010s and 1.8% in 2019 just before the pandemic. But the combination of higher interest rates and the swell of debt for pandemic relief spending has pushed that much higher.

  • Debt service amounted to 2.4% of the economy last year, CBO said, and is poised to rise to 3.1% this year and 3.9% in 2034.
  • In contrast, the previous record net interest cost for the U.S. government in CBO data that goes back to 1962 was 3.2%, reached in 1991.
  • In dollar terms, net interest is set to cross the $1 trillion per year mark in 2026 and $1.6 trillion in a decade.

What they're saying: "You can think of the increase in net interest payments as two-thirds resulting from higher rates and one-third as a result of the amount of debt," CBO director Philip Swagel told reporters Wednesday.

Of note: Those projections are premised on the Fed's policy interest rate moving downward over the coming years, settling below 3% late in this decade (they're currently near 5.5%).

Flashback: The last time the government's interest costs were anything near this level as a share of the economy, in the late 1980s and early 1990s, deficit reduction became a central political issue and bipartisan cause.

  • In the 1990s, President George H.W. Bush signed a bipartisan deficit reduction deal that, among other things, increased the top income tax rate to 31% from 28%.
  • President Bill Clinton's first budget act in 1993 raised taxes further, pushing the top rate to 39.6%.
  • Deficits fell sharply through the 1990s and flipped into a surplus in 1998.

Yes, but: Politics now are very different than they were in the early 1990s, when both parties had many deal-making moderates in their midst and fiscal deficits were a front-of-mind political issue.

  • It is less clear how today's voters, and the members of Congress who represent them, will react to the surge of debt service costs over the next few years.
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