Rising Interest Payments on the Federal Debt

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One of the best ways to understand — and explain — the country’s fiscal difficulties is to look at what we can expect to pay in interest on the rising national debt.

After all, people know that if they run up their credit card bills rather than paying them off, the interest costs on their borrowed money will eventually snowball. And higher interest rates can quickly worsen the problem.

According to recent projections by the Congressional Budget Office, the government’s net interest costs are projected to more than double as a share of the economy over the next decade, rising from 1.4 percent of GDP to 3 percent. Absent fiscal reforms, by 2046 these costs would reach 5.8 percent.

Rising interest payments would put increasing pressure on the federal budget, rising from 6 percent of federal spending to 21 percent over the next three decades. This would likely require both massive spending cuts and huge tax increases.

“Net interest costs are projected to increase as interest rates rise from unusually low levels and as greater federal borrowing directly leads to greater debt-service costs,” the CBO says in a recent blog post. “In addition, greater federal borrowing is projected to put further upward pressure on interest rates and thus on interest costs.”

CBO projects, however, that interest rates on federal debt will still remain below their average for 1990-2007.

The budget office emphasizes a mutually reinforcing pattern: “Rising interest costs push up deficits and debt, and rising debt pushes up interest costs.”

External links:
Interest Costs in Long-Term Budget Outlook (CBO)
CBO’s Long-Term Projections Show Need for Political Candidates to Address Growing Budget Challenges (Concord)

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