Lawmakers struggling with the Fiscal 2014 budget could face an even tougher challenge funding the government in the future as interest payments rise to record levels, squeezing other parts of the budget and making it more difficult to hold down deficits.
Slow economic growth and Federal Reserve monetary policies have helped keep interest rates at record lows in recent years, but the Congressional Budget Office (CBO) expects higher rates in coming years. That could make interest payments the fastest growing part of the federal budget.
For Fiscal 2013, CBO estimates interest payments will total $223 billion, or 1.3 percent of GDP. By 2038 the figure would increase to 4.9 percent of GDP or $1.46 trillion (in real 2013 dollars).
If Washington navigates its immediate budget and debt limit difficulties, interest rates are expected to rise in the next few years due to an improving economy. Yet if interest rates are even slightly higher than current projections over the next few years, it could add billions of dollars to federal interest payments.
The risks associated with rising interest payments are significant. That’s another reason why Washington should agree on a long-term deficit-reduction plan that will reduce government borrowing over the next decade and beyond.