Debt Interest Becomes One of the Government’s Biggest Costs
The federal government spent $1.36 trillion on interest on its debt during the latest fiscal year. That was more than it spent on national defense or Medicaid, making debt interest the government’s third-largest expense after Social Security and Medicare.
The growing bill is adding pressure to the federal budget. The deficit reached $1.99 trillion, up 12% from the previous fiscal year. Government revenue rose 3% to $5.4 trillion, but spending increased 6% to $7.4 trillion.
Interest Costs Are Rising Faster
The average interest rate on the government’s debt was 3.53%. That is more than twice the rate seen before the Federal Reserve began raising rates to fight inflation.
Net interest payments, which subtract certain interest income the government receives, rose 8% to $1.05 trillion. That increase was faster than the growth in total spending, revenue, or the economy. It also exceeded real economic growth of about 2% and growth measured before adjusting for inflation, which was about 6%.
The net interest bill works out to roughly $2.9 billion each day. It equals about 3.2% of the nation’s economy, a larger share than at any point since the previous high in 1991.
More Debt Must Be Renewed at Higher Rates
The nation’s total debt has reached $40 trillion. Debt held by the public is equal to about 100% of the country’s yearly economic output. With borrowing costs climbing, interest payments are expected to become the fastest-growing part of the federal budget in the years ahead.
The size of the bill also leaves the government more exposed to changes in financial markets. Treasury Secretary Scott Bessent has been relying more on short-term borrowing while paying off some longer-term debt. As a result, more than $10 trillion, or about one-third of publicly held debt, is due within the next year. The government will need to borrow again to replace that debt, potentially at today’s higher rates.
A budget forecast estimated that yearly interest expenses could reach $2.1 trillion by 2036. But the outlook could worsen if borrowing rates stay above the forecast. A rise in oil prices and bond yields after the start of the Iran conflict added to that concern.
Higher Rates Could Push the Bill Even Further
The yield on 10-year government bonds has moved above 5%. That is higher than the forecast used in the budget estimate, which projected rates of 4.1% this year, rising gradually to 4.4% by 2032 through 2036.
If yields remain about one percentage point above those projections, interest expenses could climb to $2.8 trillion by the end of the decade. That would equal 5.9% of the economy, according to an estimate from a group focused on federal budget policy.
The group’s president, Maya MacGuineas, has warned that higher interest costs can lead to more borrowing, while a larger debt load can put further upward pressure on rates. She has urged the president, Treasury secretary, and congressional leaders to address the problem, saying that no easy solution exists.
Growth Alone May Not Solve the Problem
So far, there has been little sign that lawmakers are ready to make major changes to spending or revenue. President Donald Trump has proposed $5,000 dividend checks for Americans if Republicans win the midterm elections. The government is also providing rebates to millions of people enrolled in Medicare and Affordable Care Act plans.
Bessent has argued that faster economic growth could help bring the debt under control. He has said that growth of 3% would help the country recover after the Iran conflict and that the economy has the strength to speed up.
But Congressional Budget Office Director Phillip Swagel has cautioned that growth by itself is unlikely to stabilize the debt. A stronger economy can bring in more tax revenue, but government spending can also lift wages, which may increase Social Security payments. A robust economy can also push interest rates higher, raising the cost of borrowing.
With interest rates between 4% and 5%, Swagel estimated that the economy would need to grow 7% to 8% before inflation, or 5% to 6% after inflation, to keep debt from rising compared with the economy.
Those rates are far above recent growth. The economy grew at a 2.2% annual rate in the second quarter, while even optimistic forecasts put growth for the full year at 2.5%. Swagel’s view is that growth can help, but lasting change will also require choices about government spending and revenue.