The U.S. Government's Growing Debt Burden

Debt and deficits

Debt and deficits By Daniel Bergstresser · June 19, 2024 Brandeis University The issue:

Interest payments on the federal government's debt are expected to reach $892 billion in 2024. That's more than the government is expected to spend on defense and nearly a third more than the United States has spent on debt interest in 2023. This increase reflects the combination of rising U.S. government debt and rising interest rates. And although interest rates are expected to decline slightly in coming years as inflation eases, the Congressional Budget Office (CBO) projects that interest payments as a percentage of GDP will continue to rise. The magnitude of this increase was not anticipated, even in recent years the CBO's projections for the debt interest burden have steadily increased.

Interest payments on U.S. debt have risen sharply due to the combination of rising government debt and rising interest rates. The Facts: The current high cost of servicing the national debt partly reflects the historically large size of the federal government's debt. Public debt is the sum of current and past cumulative budget deficits as well as the cumulative cost of financing these deficits. There has been a notable increase in U.S. government debt since the economic downturn caused by the Great Recession, which required increased federal spending and lower tax revenues and was followed by the pandemic shock. Furthermore, government revenues have seen a sustained decline due to changes in tax policy since 2000, which has also contributed significantly to the mismatch between government revenues and public expenditures (see here). Since 2020, debt-to-GDP levels have been higher than at any time since the late 1940s. At $28.2 trillion, total federal debt held by the public is expected to be 99% of GDP by end of 2024. The cost of servicing debt has also increased due to rising interest rates. Interest rates were high when the Federal Reserve raised its benchmark federal funds rate from near zero in March 2022 to a range of 5.25% to 5.5% in July 2023 to combat the surge in inflation that followed the pandemic recovery. As a result, borrowing costs have increased. The yield on the 10-year Treasury note was 4.2% in June 2024, as yields reached 15-year highs. While the Federal Reserve is expected to begin cutting the federal funds rate as the slowdown in inflation continues, the Congressional Budget Office projects that the 10-year Treasury rate will slowly decline to 3.6% d by the fourth quarter of 2026, then will gradually increase. again, to reach 4.1% by 2034. The combination of large debt and high interest rates means that the cost of servicing the federal government's debt relative to national income is reaching record highs without previous. At a projected $892 billion in 2024, interest payments on the federal debt represent 3.1% of GDP in 2024. Since 1940, net interest spending has never exceeded 3.2% of GDP. But, in the CBO's June 18, 2024 outlook, government spending on debt service is expected to exceed that percentage every year from 2025 to 2034. About two-thirds of the growth in net interest costs projected from 2024 to 2034 come from the expected increase in interest rates. average interest rate on federal debt, and the remaining third reflects the expected increase in the amount of debt. The interest cost of the debt depends in part on the maturity structure of the debt. The U.S. Treasury considers tradeoffs when deciding how to finance the current budget deficit and the refinancing of maturing debt. One decision concerns the maturity schedule for the outstanding debt. The U.S. Treasury issues debt securities with maturities ranging from one month to 30 years. Short-maturity debt requires frequent debt rollovers, making the Treasury vulnerable to greater volatility in interest payments. Longer-dated debts, like 30-year T-bills, generally pay higher interest rates than shorter-dated debts, like 3-month T-bills (but not always, and not recently) . Most of the outstanding debt at the end of 2022 was due to mature over the next three years. This debt was refinanced at higher interest rates, significantly increasing debt service costs. For example, nearly $7 trillion in publicly held debt was refinanced in fiscal year 2023 (October 2022 to September 2023) and every percentage point increase in interest rates over that Refinanced debt meant $70 billion more per year in net interest payments in 2023. that first year (for context, that's about 10% of the entire U.S. defense budget). The debt maturity structure remains very short, with half of the outstanding debt maturing by 2026. Recent forecasts for interest on the debt reflect the fact that much of the federal debt will be continued at higher rates. Federal debt service represents an increasingly large share of public spending. Interest payments accounted for about 13% of federal spending in 2024, the third highest spending category, ahead of spending on defense, Medicare, and income security programs (see here). This is a sharp increase from 2017, when net interest payments accounted for more than 7% of government spending, and is close to the situation in the mid-1990s, when net interest payments reached more than 15% of budgetary expenditure (see graph). This was at a time when overall debt held by the public as a percentage of GDP increased from 23 percent to 48 percent. The reduction in debt repayments between the mid-1990s and the mid-2010s reflects both lower interest rates and lower debt levels. Although the debt-to-GDP ratio increased between 2009 and 2017, net interest payments as a share of total federal spending remained below 7% during this period, primarily due to low interest rates. Projections for the debt interest burden have increased significantly over the past four years. The Congressional Budget Office currently projects that interest payments on the debt will account for more than 16 percent of federal spending in 2034. Current projections are much higher than those made two or four years ago (see chart). The differences between predicted and actual values, as well as the increase in forecasts over time, reflect the effects of changing expectations on interest rates and debt.

Higher interest payments mean less government spending is available for defense, welfare programs, research and other important government functions. Rising debt service levels contribute to the fiscal challenges our country faces. As interest payments account for a larger share of government spending, the United States must cut spending in other categories or increase tax revenue to prevent deficits from ballooning and resorting to even more of loans. The cost of servicing the debt will depend on both the level of outstanding debt and the level of interest rates. Debt has reached high levels by historical standards, but until recently this increase has coincided with very low interest rates that have kept debt servicing costs relatively low. However, high debt levels mean that interest rate increases like those we have seen over the past two years will have a significant impact on our country's budget deficits, which could require higher taxes or a reduction in expenses.

Sources 1/ https://Google.com/ 2/ https://econofact.org/the-rising-burden-of-u-s-government-debt The mention sources can contact us to remove/changing this article

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