October 20, 2014

How do interest payments fit into the federal budget?

  • The national debt has grown significantly in recent years due to rising annual deficits. A deficit occurs in any year the government spends more...

The federal budget consists of three broad categories: discretionary spending, mandatory spending, and interest payments on the public debt. Congress decides each year how much funding it will provide for discretionary programs. Mandatory spending, on the other hand, is generally determined by current law and thus requires no action by Congress for the funds to be paid. Similarly, the Treasury Department makes interest payments on the debt automatically.

Those interest payments underscore why deficits and debt matter to the American public. Excluding mandatory programs, interest payments on the debt are second in cost only to defense spending, which towers over all other discretionary programs. And this is at a time when interest rates are at historically low levels. Absent policy changes, federal interest costs are expected to snowball in the years ahead as interest rates rise and large federal deficits continue.