Most economists say these payments are economically wasteful, because the government could spend money in more productive ways than paying back bondholders. For instance, the United States spent more on interest than on all federal programs for children, including child care, education and tax credits for families, according to the Committee for a Responsible Federal Budget, which advocates for a lower deficit.
This year’s sum was almost twice as much as two years ago. The government spent $476 billion paying off the interest on its debt last year and $352 billion doing so in 2021.
Although interest payments have previously been higher as a share of the nation’s economy, budget experts warn debt payments will likely only gobble up more and more of the government’s budget.
Within three years, if interest rates remain elevated, payments on the debt could become the second-largest federal program — behind only Social Security, which provides pensions for tens of millions of seniors, analysts say. Depending on future rates, interest payments on the debt could reach a whopping $2 trillion per year by the end of the decade, consuming close to 30 percent of all federal tax revenue — and also forcing the government to borrow more just to pay off current bondholders, according to Brian Riedl, senior fellow at the Manhattan Institute, a conservative-leaning think tank. That number would be lower if interest rates fall.
In 2021, the nonpartisan Congressional Budget Office projected payments on the debt would cost roughly $5.4 trillion the next decade. In May of this year, it projected payments on the debt would rise to $10.6 trillion over the next decade, or to 2033.
“The federal government is sitting on a ticking time bomb. Payments on the debt already doubled over the last two years, and are expected to double again over the next decade,” Riedl said. “Congress remains completely asleep at the wheel, and unwilling to make even minor gestures toward reining in the toxic combination of rising debt and higher interest rates.”
The explosion in interest payments reflects the growth in the annual federal deficit, which unexpectedly surged this year after contracting the year before.
After record U.S. government spending in 2020 and 2021, the deficit dropped from close to $3 trillion to close to $1 trillion in 2022. But rather than continue to fall to its pre-pandemic levels, the deficit unexpectedly jumped this year to roughly $2 trillion. (These numbers ignore President Biden’s $400 billion student debt cancellation policy, which was struck down by the Supreme Court this year and never took effect.)
The rise in the deficit has surprised economists in part because deficits typically fall during periods of economic growth, and the economy is still growing. This increase was the result of higher-than-expected spending and a decline in tax receipts as inflated asset bubbles began to pop, leading to smaller capital gains tax receipts. A surge in payments from a pandemic employee retention program also contributed.
The larger spending imbalance has collided with rising borrowing costs. In July, Treasury was auctioning off 30-year bonds at a rate of about 4 percent. That has risen to around 5 percent, with the premium on short-term debt rising to around 5.5 percent, due to the Federal Reserve’s campaign to raise interest rates to cool the economy.
“Regardless of where they’re borrowing, they’re facing higher costs,” said Donald Schneider, who served as a top aide to House Republicans on the Ways and Means Committee. “It’s a dramatically different picture than where we were.”
Biden administration officials emphasized the decline in revenue as they denied the White House’s spending initiatives expanded the deficit. Treasury Secretary Janet L. Yellen has said that she believe interests will come down in the long-run due to structural economic factors, such as an aging U.S. population, and emphasized on Friday that Biden’s proposals have been aimed at lowering the deficit.
“The Biden Administration continues to focus on navigating our economy’s transition to healthy and sustainable growth. As we do, the President and I are also committed to addressing challenges to our long-term fiscal outlook,” Yellen said in a statement.
Some economists argue that the danger posed by higher interest payments is overstated. Although costs have risen, the U.S. government is still attracting purchasers of its debt from all over the world. And as inflation eases to its lowest point, the central bank is likely to pare back its rate hikes — which would make new bonds cheaper to repay. Interest payments on the debt are still smaller today as a share of gross domestic product in the United States than they were for much of the 1990s — and the economy survived that period just fine.
Japan has had no trouble continuing to print money despite owing more than twice as much debt as a share of its economy as the United States does, said Dean Baker, an economist at the left-leaning Center for Economic and Policy Research.
Bobby Kogan, an analyst at the Center for American Progress, a center-left think tank, has found that the Bush and Trump tax cuts and their bipartisan subsequent extensions have added $10 trillion to the national debt so far. Republicans have blamed higher spending under Biden, including the $1.9 trillion American Rescue Plan passed by Democrats in 2021.
“Obviously, it’s better to pay less interest than more, but the idea it’s some disaster is just wrong. This is not a scary thing,” Baker said. “We’re clearly nowhere in the ballpark of the credibility of the U.S. government being called into question.”
Still, other policy experts said the risks are real and growing. A wide range of financial assets, including mortgage rates and corporate lending, is tied to the interest rates on U.S. debt. If yields on Treasury continue to rise, it would likely mean even more increases in mortgage rates that have already pushed millions of Americans out of the homebuying market.
“Rising net interest payments are bad because we have so many other priorities we need to focus on — child care, health care, the continued housing crisis,” said Kyla Scanlon, a financial analyst who founded Bread, which produces financial education. “And now, Wall Street seems unwilling to absorb new issuance as debt grows faster than the economy. If Wall Street freaks out and stops accepting debt levels and demanding higher compensation for accepting said debt, that would put a lot of pressure on the U.S. government, and exacerbate the issues that we are already seeing with foreign demand, corporate financing, mortgage rates, and more.”