Concept_Interest

As Debt Rises, Interest Costs Could Top $1 Trillion

Feb 13, 2019 | Budgets & Projections

The fastest growing item in the budget over the next decade will be interest on the debt, according to the Congressional Budget Office (CBO).

In this piece, we show that:

  • Interest payments will rise from $325 billion last year to $928 billion by 2029, a nearly threefold increase. If tax cuts and spending increases are extended, interest will exceed $1 trillion and set a new record as a share of the economy.
  • The federal government will spend more on interest than on Medicaid or children by 2020. By 2024, interest will match defense spending.
  • If interest rates rise 1 point higher than projected, it will cost an extra $1.9 trillion over ten years.

Under current law, net interest payments will nearly triple over the next decade, rising from $325 billion last year to $928 billion by 2029. Under the Alternative Fiscal Scenario, which assumes lawmakers extend the tax cuts and spending increases passed over the last two years, interest on the debt will exceed $1 trillion in a decade.

As a share of the economy, interest payments will nearly double – from 1.6 percent of Gross Domestic Product (GDP) last year to 3 percent by 2029. Under the AFS, interest would be 3.4 percent of GDP by 2029, surpassing the post-WWII record  set in 1991 when interest payments were 3.2 percent of GDP.

Nearly two-thirds of the projected increase in interest spending over the next decade will come as a result of our growing national debt, while the other third will be the result of interest rates rising toward more normal levels (though remaining well below historic averages) under CBO's projections.

Net interest spending will grow faster than any other part of the budget. CBO estimates that interest costs will increase by 186 percent from 2018 to 2029 (220 percent under the Alternative Fiscal Scenario), while GDP will increase by 53 percent and consumer prices by 25 percent over that same period. Meanwhile, Social Security and federal health care programs – the two largest categories of spending in the federal budget – will grow by 89 percent and 96 percent, respectively, through 2029; discretionary spending will grow by 21 percent and revenue by 70 percent (38 percent and 59 percent under the Alternative Fiscal Scenario, respectively).

As a consequence of this rapid growth, net interest payments will consume a larger and larger share of total federal spending over the next ten years, climbing from 8 percent of the budget last year to 13 percent by 2029. Spending on net interest will eclipse Medicaid spending by 2020, non-defense discretionary spending by 2024, and defense spending by 2025. As we've shown in the past, interest is on course to be the single largest government program within three decades.

Measured another way, net interest payments will exceed total federal spending on children by next year. That means the federal government will soon spend more on servicing the past than investing in the future. 

Moreover, the situation could end up being far worse than current projections indicate. CBO expects the interest rate on ten-year bonds to remain below 3.8 percent, significantly below the 6 percent average over the two decades prior to the Great Recession.

If interest rates ended up 1 percent higher than projected, CBO estimates interest costs would increase by $1.9 trillion over the next decade, reaching more than $1.2 trillion in 2029 alone and pushing debt to 99 percent of GDP. Under the Alternative Fiscal Scenario, we estimate interest costs would increase by about $2.4 trillion over a decade to $1.4 trillion in 2029 alone and push debt to 112 percent of GDP.

As the national debt continues to grow and interest rates on Treasury bills rise closer to their historical norms over the coming decade, the federal government’s interest payments are set to increase dramatically, taking up a larger and larger chunk of overall federal spending. Returning our debt trajectory to a sustainable course through a combination of spending reductions and revenue increases sooner rather than later would significantly alleviate this burden.