The Impact of Debt Interest Payments
Three charts and some explanation on net interest payments on debt for 2024 and higher in 20525 and 2026. Much of this is due to the pandemic and Biden paying out funds in support of the constituency. The result is higher interest rates as the Fed attempts to stabilize the economy and gain control of spending.
I do not expect any of the efforts on Trump to deplete the ranks of the Federal Government and the various departments to have much impact. That is other than decrease the service which comes out of those entities. I do expect the US to go into recession due to deflation. If I were to make a guess, I believe we will have a recessional experience similar to what the US experienced in 1981 and 1982.
Interest on the Debt to Grow Past $1 Trillion Next Year, 2025-02-06, CRFB
The Congressional Budget Office’s (CBO) latest budget and economic outlook includes a troubling projection for net interest payments on the debt, which have grown extensively over the last few years as a result of high interest rates and a high and rising national debt.
CBO’s latest projections show:
- Net interest payments will total $13.8 trillion from Fiscal Year (FY) 2026 through 2035.
- Interest will rise from $881 billion in FY 2024 to $1 trillion in FY 2026 before climbing further to nearly $1.8 trillion in 2035.
- Interest on the debt is already larger than spending on Medicare and national defense – it is second only to Social Security.
Net interest has been exploding over the past few years, with payments rising from $223 billion in 2015 to $345 billion in 2020 before nearly tripling to $881 billion in 2024. In 2025, CBO projects net interest will total $952 billion, a near-record 3.2 percent of Gross Domestic Product (GDP), and interest will eclipse its record as a share of the economy in 2026.
In 2024, interest payments were so large that they outgrew spending on Medicare – the nation’s largest federal health care program for seniors and people with disabilities – as well as the entirety of spending on national defense. Over the next decade, interest payments will total $4.3 trillion more. An ~ $13.8 trillion total and more than we are going to spend on defense.
The uptick in net interest is due to a combination of higher interest rates and higher debt. Interest rates have increased over the past few years in efforts to combat inflation and policymakers have added significantly to the debt over the past several years. Interest on the Debt to Grow Past $1 Trillion Next Year. 2025-02-06
Interest payments on the debt and interest rates will continue to rise so long as the national debt continues growing as a share of the economy. Policymakers should ensure any new priorities are paid for with proper offsets and enact other deficit reductions to stabilize the debt and ultimately reduce it as a share of the economy.
Interest Rates Surge Near Record Highs, 2024-04-18, CRFB
Interest rates are once again on the rise across nearly every maturity. The ten-year Treasury note closed at 4.7 percent on Tuesday, up from 4.1 percent just six weeks ago and 1.6 percent at the start of 2022. The three-month bill is now yielding nearly 5.5 percent, up from less than 0.1 percent at the start of 2022. As a result, federal interest costs are surging.
Interest rates have been on the rise since early 2022, as the Federal Reserve worked to fight the surge in inflation and federal debt has continued to rise. Ten-year Treasury rates have spiked nearly 60 basis points in six weeks on news of higher-than-expected inflation data, stronger-than-expected economic data, and weak Treasury auctions.
In combination with high and rising debt, high interest rates are causing federal interest costs to explode. Interest costs in the first half of this Fiscal Year (FY) have already totaled $429 billion – equal to 39% of all individual income taxes paid so far. It is projected to reach $870 billion for the full year (as reported above debt payment was $881 billion). At this level, interest payments will surpass spending on both defense and Medicare this year and rise to become the second largest line item in the budget. “Interest Rates Surge Near Record Highs,” 2024-04-18
By next year, interest is projected to reach a record 3.2 percent of Gross Domestic Product (GDP) – compared to 1.5 percent just three years ago – which exceeds the record set back in FY 1991. And by 2051, interest costs are projected to reach 5.9 percent of GDP and become the single largest line item in the federal budget.
This spells trouble for debt sustainability. With long-term nominal economic growth projected to average around 4 percent per year, the interest rate on new debt is now well above the growth rate (R>G). This could lead to a dangerous debt spiral, particularly as rising debt further pushes up interest rates and stifles economic growth. A 1 percentage point increase in interest rates over the Congressional Budget Office’s baseline will add another $2.9 trillion to the debt.
Although most of our national debt was issued when interest rates were low, that debt is rolling over into a high-rate environment and further borrowing continues. Rising Treasury interest rates will put even more pressure on our high and rising debt; the best way to mitigate these costs is through thoughtful and responsible fiscal reforms that limit additional borrowing, reduce inflationary pressures, and push down interest rates.
Couple questions (mostly rhetorical designed for thought). Who receives the interest payments and what economic effect will that have? If higher debt pushes up interest rates how did Japan manage to a have a debt to GDP ratio of 250% while long term interest rates have stayed around 1%?
Mark:
It is easier for me to cite from somewhere else.
Interesting parts of the citation:
One article states “22% of the national government’s debt is owned by the government itself. Government agencies often do this sort of thing for bookkeeping purposes, but it’s fair to say that to some extent this portion of the debt is simply money that the government owes to itself and is less important as a result.
What about the remaining 78%? Well, about one third of the remaining debt is held by foreign citizens and groups. In other words, around $7.3 trillion of bond payments are owed to foreign individual investors, groups, and governments. The largest two nationalities that hold US debt (outside of US citizens) are the Japanese and the Chinese.
The other nearly $20 trillion are owed to domestic groups.”
In all cases, the interest goes to the holders of the bonds. Fed Reserve holds a large amount of the debt.
This is superficial in a commentary. Others can probably fill in more than I said here.
Interest on the National Debt—Who Does It Go To?
Thanks Bill. My point being is the government pays the money to the public (except for the debt owned by the government). So what is the difference between government interest payments and stimulus payments that were sent out during the pandemic?
Mark:
Most likely the amount of printing they have to o.
Bill, I still don’t understand “printing”. The government printed money and spent it during the civil war. Commonly known as the greenback. The government now issue checks or direct deposit. The Fed credits banks with the money (reserves) to cover the deposit.