US federal budget hits grim milestone as interest payments outpace defense spending

The United States has long had the world's largest defense budget, with spending this year expected to approach $900 billion.

Yet these expenditures are quickly being eclipsed by the fastest-growing share of federal cash outflows: interest payments on the national debt.

For the first seven months of fiscal 2024, which began last October, net interest payments totaled $514 billion, outpacing the defense sector by $20 billion. Budget analysts believe this trend will continue, making 2024 the first year the United States will spend more on interest than on national defense.

Just two years ago, interest payments represented the seventh largest category of federal spending, behind Social Security, non-Medicare health programs, income assistance, national defense, Medicare and education.

Interest is now the third largest expense after Social Security and healthcare. And it's not because other programs are decreasing. While most government spending increases modestly from year to year, interest spending in 2024 is 41% higher than in 2023.

Interest payments are skyrocketing for two obvious reasons.

The first is that annual deficits have exploded, leaving the country with a gargantuan total federal debt of $34.6 trillion, 156 percent more than the national debt at the end of 2010.

In the 1990s, the average federal deficit was $138 billion per year. In the 2000s, it was $318 billion. In the 2010s, it stood at $829 billion. Since 2020, the annual deficit has reached $2.24 trillion, largely due to pandemic-related stimulus in 2020 and 2021. Projections for 2024 call for a deficit of $1.5 trillion.

As a percentage of GDP, the annual deficit has almost doubled in just 10 years, from 2.8% in 2014 to a projected 5.3% in 2024. So there are a lot more loans to pay interest on.

The government is also paying more to borrow as interest rates have climbed over the past two years. Like consumers buying homes and cars, Uncle Sam benefits from cheap money when rates are low and bears a greater burden when rates are high.

From 2010 to 2021, the average interest rate on all Treasury securities sold to the public was only 2.1%, which helped keep total interest payments at a manageable level.

But in 2022, the Federal Reserve began raising rates to control inflation, and the government now pays an average interest rate of 3.3%. So the amount of money borrowed keeps increasing, as does the cost of borrowing.

More taxpayer money will be spent on interest expenses, which will ultimately leave less money for everything else, and at some point the Treasury will no longer be able to borrow its way out of the problem.

The story continues

This is an unsustainable situation, which could lead investors to lose confidence in the government's solvency and demand even higher rates to purchase Treasury bonds.

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The urgency of the problem, however, is open to debate.

At the recent Milken Institute conference in Los Angeles, luminaries such as billionaire investor Ken Griffin and former House Speaker Paul Ryan warned of a looming debt crisis if interest costs of government continue to grow. But many leading financiers have also touted the United States as the best destination in the world to invest, despite all its problems.

And many predictions of a debt crisis when interest charges were much lower have so far proven wrong.

Soldiers stand in front of a U.S. Air Force F-22 Raptor fighter jet during a briefing in a hangar at the U.S. Air Base in Spangdahlem, Germany, September 3, 2015. (REUTERS/Ina Fassbender) ( REUTERS / Reuters)

Two people who appear unfazed by America's debt burden are President Joe Biden and former President Donald Trump, the two leading contenders in the race for the White House this year. Reducing the deficit is not a goal of his presidential campaign either.

Biden has some sort of plan. He would raise taxes on corporations and the wealthy and use some of that revenue to reduce annual deficits. But Biden also wants to spend more on social programs, which could offset any savings.

Trump says he would encourage more oil and gas drilling, which would somehow produce a windfall of tax revenue that would help pay down the debt. But there's no obvious way for that to happen, no matter how much drilling is done.

Additionally, both men were responsible for a huge increase in the national debt.

The national debt increased by $7.8 trillion during Trump's four years as president and by $6.8 trillion during Biden's first three years and four months.

Earlier this year, the Committee for a Responsible Federal Budget helped Yahoo Finance analyze who is responsible for the national debt, and the blame falls more or less equally on administrations of both parties who borrow to finance wars, government cuts, taxes, spending programs and stimulus measures during the period. recessions.

When the time comes to address the debt, the inevitable solution will be a mix of spending cuts and tax hikes that will make a lot of people unhappy.

Which reveals the real reason no politician wants to tackle the problem: everyone hopes they'll be the one to pursue it.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.

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