×

Interest payments could become one of the federal govt's biggest line items

Uncle Sam is about to get hit with higher interest payments.

Much higher.

And those higher costs will force the government to raise taxes, cut spending or borrow more to make up the shortfall.

That warning comes from a new report by the Committee for a Responsible Budget, following last week's move by the Federal Reserve to begin raising interest rates, a major turning point that signals a historical reversal of a long-term decline in the cost of borrowing.

Rising interest rates help savers and hurt borrowers. As the biggest borrower on the planet, the U.S. government will soon begin paying more to investors holding roughly $14 trillion in Treasury debt. Over the next 10 years, those interest payments are projected to become one of the biggest line items in the federal budget.


"As debt continues to grow and interest rates return toward more normal levels, interest spending is slated to be the fastest growing part of the budget," the budget watchdog group warned in its report.

The group also cautioned that interest payments could rise even more quickly if the incoming Trump administration follows through with campaign promises to cut taxes and increase spending on infrastructure, which the group estimates would cost $6 trillion over a decade.

Borrowing to fund those programs would raise both the amount of debt and the interest cost on each new dollar, because the issuance of that much new debt would tend to push interest rates even higher, the group said.

That estimated $6 trillion in new spending would boost interest costs by $2.5 trillion over a decade, including over $450 billion in 2026 alone.

Even without new spending, the cost of servicing the national debt is expected to nearly triple over the next 10 years, according to estimates by the Congressional Budget Office. That's more than twice as fast as the growth of spending on Social Security or Medicare.

Those increases are based on a gradual, modest rise in rates, with the 10-year Treasury notes paying 3.6 percent interest by the early 2020s.

Even at rates that would be lower than most of the last four decades, debt interest is expected to be the biggest single budget item by 2027, more than the Defense department budget.

If rates go higher, the cost of debt service will rise even faster.

Over the longer term, the government's interest expenses are expected to continue rising as a share of GDP, overtaking peak levels seen in the 1980s, when the Federal Reserve pushed rates to 20 percent to tame runway inflation. Based on current policies, interest payments will consume 6 percent of GDP by 2055. That's roughly double 1980s levels.