Jul 12, 2024
The U.S. is projected to spend a staggering $892 billion on net interest payments in the current fiscal year — 36% more than the previous year — according to an updated outlook from the Congressional Budget Office released in June.
This would surpass defense spending, which is projected to be $849 billion — and come close to spending for Medicare at $903 billion.
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Debt is “not free anymore,” Kenneth Rogoff, an economics professor at Harvard University, told CNN.
“In the 2010s, a lot of academics, policymakers and central bankers came to the view that interest rates were just going to be near zero forever and then they started thinking debt was a free lunch,” he said. Interest rates on debt have been on the rise since 2022.
“That was always wrong-headed because you can think of government debt as holding a flexible-rate mortgage and, if the interest rates go up sharply, your interest payments go up a lot. And that’s exactly what’s happened all over the world.”
The CBO projects debt to continue to climb
America’s debt is predicted to continue ballooning in the coming years, even after exceeding $34 trillion for the first time in history this past winter.
“The U.S. federal government's on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy,” Federal Reserve chair Jerome Powell said in an interview with 60 Minutes in February.
“It's probably time, or past time, to get back to an adult conversation among elected officials about getting the federal government back on a sustainable fiscal path.”
The CBO forecasts that net interest payments on debt will eclipse $1 trillion in fiscal year 2025, while climbing up to $1.7 trillion by 2034.
And debt held by the public is projected to rise from 99% of GDP in 2024 to 122% in 2034.
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Karen Dynan, former chief economist at the U.S. Treasury and now professor at the Harvard Kennedy School, told CNN that if debt hits 150% or 180% of GDP, it would mean “very serious costs for the economy and society more broadly.”
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What this could mean for you
In a 2023 paper, Dynan contends that higher government debt — especially in comparison to borrowing by households and businesses — can drive up interest rates, making it more expensive to borrow and reducing future output and national income.
To make matters worse, investors could become disinclined to lend money to the government if they’re concerned the debt will not be repaid, increasing the risk of a fiscal crisis.
The International Monetary Fund warned in June that “chronic fiscal deficits” in the U.S. must be “urgently addressed.”
So, what does that really mean for whoever takes office after the November presidential election?
Dynan told CNN that taking action on this issue will require either tax hikes or cuts to benefits, such as Social Security and health insurance programs.
“Many [politicians] are not willing to talk about the hard choices that are going to need to be made,” Dynan said. “These are very serious decisions … and they could be very consequential for people’s lives.”
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Serah Louis is a reporter with Moneywise.com. She enjoys tackling topical personal finance issues for young people and women and covering the latest in financial news.
