Why Interest Payments Are Blowing Up the Federal Budget

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Key Takeaways

• The U.S. government will spend a record $1.2 trillion on interest payments in 2024, the highest amount ever recorded.
• Interest payments are driven by a combination of deficit spending, especially during the pandemic, and the Federal Reserve’s campaign of anti-inflation interest rate hikes.
• The trajectory of the deficit could be influenced by the election.
• While both Democrats and Republicans propose new tax cuts and spending that could push up the deficit, Vice President Kamala Harris has proposed tax increases on the wealthy and corporations, to offset them.

The U.S. government is on track to spend more than $1 trillion on interest payments this year, surpassing military spending for the first time in history.

Interest payments on the national debt (held by the public in the form of Treasury securities) will cost the government $1.2 trillion in the government’s fiscal year ending in October, the Treasury Department said in a monthly report on the budget. Net interest outlays are the third costliest item in the budget behind Social Security and Medicare benefits.

Economists have grown increasingly concerned about the potential impact of those payments on the U.S. economy. Interest payments took up 2.4% of the entire U.S. gross domestic product in 2023, and The Congressional Budget Office estimates that could swell to 3.9% over the next 10 years.

Why Is The Government Paying So Much Interest?

Two major factors have driven those payments skyward. First, the government spent trillions to support households and the economy during the pandemic, paying for it by borrowing rather than raising taxes. Second, the Federal Reserve raised interest rates starting in 2022 to fight inflation, which pushed up how much the government owes for that debt.

Although the Fed is set to gradually lower those interest rates starting next week, the pressure on the budget is likely to keep ratcheting up in the years to come.

The results of the presidential election could have a major impact on the trajectory of the budget deficit. Both former President Donald Trump and Vice President Kamala Harris have proposed tax cuts and new spending that could push up the budget deficit. Harris has also proposed offsetting those new costs with tax increases on the wealthy and corporations. Trump has proposed heavy tariffs on foreign goods, but mainstream economists are skeptical those would bring in much revenue compared to the impact of the tax cuts.

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Conclusion

The rising interest payments on the national debt are a cause for concern in the U.S. economy. With the government spending trillions to support the economy during the pandemic and the Federal Reserve raising interest rates, the amount owed for the debt has skyrocketed. This has led to interest payments surpassing military spending and becoming the third costliest item in the budget. Economists worry about the potential impact on the economy, with interest payments taking up a significant portion of the GDP. The trajectory of the deficit could be influenced by the outcome of the presidential election, as both Democrats and Republicans propose policies that could increase the deficit. Vice President Kamala Harris has suggested tax increases on the wealthy and corporations to offset new costs, while former President Donald Trump has proposed tax cuts and tariffs. It remains to be seen how these proposals will impact the budget deficit and the overall economy in the coming years.