Five Facts on Interest Payments on the Federal Debt
If you haven’t been tracking the size of our national debt, avert your eyes. As of August 2023, it stands at a sum of $32.7 trillion owed, translating to nearly $100,000 per citizen. With a budget deficit projected to surpass $1.7 trillion dollars more this year alone, the fiscal hole is only going to get deeper. But this isn't just numbers on paper; a growing national debt carries with it substantial costs, particularly in the form of ever-growing interest payments that the U.S. government must manage.
Here are Five Facts about these interest payments that underscore the urgency of tackling this growing issue:
- In 2022, interest payments on the debt totaled $476 billion.
These payments represent one of the single largest expenses in the federal budget. To put this in perspective, $476 billion is comparable to the budgets for education, housing, and veterans programs combined. As the national debt continues to rise, so does the cost of these interest payments, increasing the strain on the U.S. government's finances.
- As of July 2023, the US government has a monthly interest rate on the debt of 2.84 percent.
The total cost of interest payments is affected by a combination of total debt and interest rates, which are not static but subject to monetary policy decisions by the Federal Reserve. A slight increase in this rate can translate into tens of billions of additional interest payment dollars annually, making the management of interest rates a critical concern for fiscal policymakers. In comparison, in FY 2021, the average interest rate on the federal debt stood at only 1.605 percent, a record low due to the COVID-era monetary policies adopted by the Fed.
- Interest payments are expected to reach record high levels in relation to the size of the economy by 2029.
The nonpartisan Congressional Budget Office has estimated that, relative to the overall size of the economy, the total sum of interest payments on the debt will rise from 2.7 percent of national economic activity in 2024 to 3.7 percent in 2033. The Peter G. Peterson Foundation notes that by 2029, this increase would surpass the previous record for interest relative to gross domestic product of 3.2 percent in 1991.
- By FY 2031, the federal government will spend more on interest payments than on combined non-defense discretionary spending.
Non-defense discretionary spending, which generally accounts for three to four percent of GDP in a given year, covers everything in the federal budget from infrastructure maintenance to research grants. Yet, it could be eclipsed by interest payments on the debt within the decade. This is especially concerning given that as recently as last year, the Center for a Responsible Federal Budget projected that we wouldn’t hit this milestone until FY 2032, meaning that these deadlines could continue to be moved closer and closer.
- Higher interest payments on the debt hamper economic growth.
As interest rates rise and the debt grows, interest payments become a larger portion of government spending. In turn, according to the IMF, less money will be available for public services, infrastructure investments, and education. This, in turn, may hinder long-term economic growth, as governments will have less capacity to invest in growth-promoting initiatives due to the increasing burden of debt servicing.
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