WASHINGTON — For decades, worries about the exploding national debt—now a staggering $31.3 trillion — were tempered by low interest rates that made it relatively cheap to keep borrowing.
But with interest rates rising rapidly, a long-feared debt crisis could be arriving soon.
Like a consumer grappling with a massive credit card balance, the federal government is paying more just for the interest on the national debt. Government projections show those interest costs tripling from $399 billion this year to $1.19 trillion in 2032. Borrowing most likely will have to increase just to pay for the higher interest expenses.
And on it goes, a vicious cycle that promises bruising fights over debt and spending in Washington next year, partisan conflict which could shake financial markets and an economy already at risk of falling into recession.
“If you’re borrowing more and more every year on autopilot to fund programs that we promised, which [you] lack the revenue to pay for, you then have a compounding problem where interest on the debt compounds and just adds to the burden,” said Michael A. Peterson, chief executive of the Peter G. Peterson Foundation, which promotes deficit reduction and has been sounding the alarm on the debt for years.
“Interest on the debt compounds and just adds to the burden and that puts you in this rapidly growing death spiral that we’re in,” he said.
The federal government paid $103 billion in interest on the debt in the first two months of this fiscal year, an 87 percent increase over what was paid in October and November of 2021, the Treasury Department reported this month. The main reason: the aggressive interest rate hikes this year by the Federal Reserve to fight decades-high inflation.
Those hikes translate into higher interest rates for the bonds the government sells to raise the money to pay for spending that exceeds taxes and other revenue. A year ago, the interest rate on benchmark 10-year Treasury bills was 1.5 percent. It’s more than doubled to about 3.7 percent now, and the Fed has forecast more rate hikes are coming next year.
The nonpartisan Congressional Budget Office projected this spring the government would spend a total of $8.1 trillionon interest alone over the next decade — and that figure probably already is outdated because of a faster-than-anticipated pace of interest rate hikes.
Interest costs as a percentage of the nation’s total economic output will double to 3.3 percent by 2032, and more than double again to 7.2 percent in the two decades after that, the CBO said this summer. That would be the highest since the government began tracking the data in 1940 and top the total spending on Social Security anticipated in 2052.
The rising interest payments could siphon money from government programs that invest in expanding the economy, such as scientific research and rebuilding infrastructure. That in turn could slow economic growth, which would lead to more deficit spending.
“It’s the termites under the front porch,” G. William Hoagland, the senior vice president at the centrist Bipartisan Policy Center think tank, said of the growing national debt. “They’re working away at it, you don’t see them, but one day you step out on that porch and you go through it.”
Right now, the $31.3 trillion debt is nearly as large as the nation’s total economic output, the highest ratio since the mid 1940s after the huge borrowing needed to fight World War II. By 2052, CBO projects the ratio will be dangerously high at close to double annual economic output, driven in large part by higher spending on Social Security and Medicare as the population ages.
Republicans will take control of the House on Jan. 3 and are already pointing to the rising debt and interest costs as a call to arms on reducing government spending, even though much of the increase in the deficit came when they held power in Washington.
“If we’re going to make a decision on funding government, when we have more than a $31 trillion debt, when we spent more than $100 billion in this new fiscal year just on interest alone, [when] we have runaway inflation we haven’t seen in 40 years based on the mismanagement and spending of the Democrats, why would you feel comfortable moving forward that way?,” House Republican leader Kevin McCarthy told reporters this month in opposing the $1.7 trillion government funding package rushed through Congress in recent days.
Republicans have said they plan to seek spending cuts and possibly changes to Social Security and Medicare when the US approaches the statutory limit on borrowing at some point next year and Congress will have to increase it. That’s led to charges of hypocrisy given their willingness to raise the limit when the debt was rising during the Trump administration.
It took about 200 years for the nation to accumulate $1 trillion in debt, but the figure started rising more quickly with growing budget deficits in the 1980s. This century, the debt rose $4.9 trillion during President George W. Bush’s eight years in office, $9.3 trillion during Obama’s two terms and $7.9 trillion in Trump’s four years, according to Treasury data. So far, since President Biden took office in 2021, the debt has increased $3.5 trillion.
Biden and Democrats have warned that it’s irresponsible to put the federal government at risk of defaulting on its obligations by failing to raise the debt limit, which would prevent the Treasury Department from borrowing to pay some of the nation’s bills and bondholders.
“Nothing, nothing, nothing will create more chaos and do more damage to the American economy than playing around with whether we pay our national bills,” Biden said at a pre-midterm election campaign rally on Nov. 1.
He has said he won’t negotiate over the debt limit and won’t consider cutting Social Security or Medicare. Democrats made the Republican talk of potential cuts to Social Security a midterms rallying cry, a move Republicans labeled as “scare tactics” that cost them more wins in the elections.
The debt limit has become a partisan flashpoint in recent years, and the stakes are even higher now with rising interest costs. Republican opposition to raising the debt limit in 2011 during the Obama administration sparked a showdown that caused the first ever downgrade in the US government’s credit rating. The limit was raised at the last minute, but the dispute rattled financial markets and the lower credit rating led to $1.3 billion in additional federal borrowing costs that year alone.
The debt is now double what it was back then and interest rates are higher and still rising, so the stakes are much greater if another confrontation spurs additional credit rating downgrades, said Dana M. Peterson, chief economist at the Conference Board, a private research group.
“Borrowing costs are already elevated and then you add on a debt ceiling debacle,” she said. “Will markets be forgiving or will they punish the US?”
Daniel Bergstresser, an associate finance professor at the Brandeis International Business School, said a debt limit fight would be a self-inflicted wound at a time when US borrowing costs still remain relatively low.
“The US benefits tremendously from the confidence the rest of the world has in our political system,” he said. Because of that, Bergstresser added, Treasury bonds are a benchmark in the global financial system and “that is not something that you really want to monkey around with.”
The growing costs of paying for the national debt takes money away from other government programs and creates a vulnerability if there’s another crisis like the pandemic that requires huge amounts of unanticipated spending, Michael Peterson said.
“COVID cost us about $6 trillion in emergency measures that were supported by many Americans and got bipartisan support in Congress,” he said. “I would hate to be in a position down the road where we face another unexpected crisis ... and we’re not in the right position to be able to borrow emergency resources.”
Peterson said Democrats and Republicans have to be willing to give on lowering spending and raising taxes to solve the problem. He said there’s a “huge menu of options” for reducing the nation’s long-term debt, but it’s important to make major structural reforms and act quickly to address the problem before it gets worse.
“From a policy perspective, the solutions are there,” Peterson said. “And its eminently possible to do so and to do so in a way that’s reasonable ... and sensitive to the most vulnerable.”
Hoagland is a veteran of many Capitol Hill funding battles after serving as a top Republican budget staffer from 1982 to 2007. He said there’s plenty of blame for both parties for the skyrocketing debt. Democrats increase spending on social programs when they’re in power and Republicans boost defense and cut taxes when they’ve been in charge.
Over the years, major bipartisan efforts to address the growing debt, including one that followed the 2011 debt limit fight, ultimately failed because both parties wanted to continue funding their priorities and neither wanted to make politically difficult decisions.
But Hoagland said the fast-rising interest costs on the national debt could change the dynamic.
“I’d like to think the reckoning is coming, the chickens are coming home to roost, so to speak. I’ve thought that over many years in my career and it never really translated,” Hoagland said. “But there’s a different sense here right now.”