Interest burden on U.S. national debt approaches 30-year high

Uncle Sam is spending above his means, and it’s costing taxpayers dearly
By Sam Bourgi
•
05 November 2024
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Washington national debt

Washington’s exorbitant budget deficits are getting harder to manage as interest payments on the national debt soar to nearly three-decade highs.

According to government data, the U.S. Treasury spent $882 billion on net interest payments in the 2024 fiscal year, which ended in September. This translates into about $2.4 billion in daily interest payments.

The interest burden amounted to 3.06% of the country’s GDP, the highest percentage since 1996.

As Creditnews reported, interest payments on the national debt exceeded defense spending for the year.

As of October, the U.S. national debt stood at a colossal $35.85 trillion—a figure that includes intragovernmental debt, or “debt the government owes to itself.” Of this amount, roughly $27 trillion was cash borrowed from investors.

Economists worry that high budget deficits may politicize key government programs, such as Social Security and Medicare.

“The higher interest costs are, the more politically salient these issues are,” Wendy Edelberg, a director at the Brookings Institution, told Bloomberg.

As deficits grow, lawmakers may realize that “funding our spending priorities through borrowing is not costless,” she explained.

This may eventually trickle down to the average American, who is expecting to be wooed by new government programs or tax cuts following the November presidential election.

Tax cuts? Not so fast

One of the biggest ironies of Washington’s massive budget deficit is that several lawmakers are proposing to make it worse by offering tax cuts.

As Bloomberg reported, a Trump White House, coupled with GOP control of both houses of Congress, could lead to new demands for sweeping tax reform.

“It would just be remarkable if what came out of the tax debate next year was a whole group of policymakers looking at our debt trajectory and deciding just to make it worse,” said Edelberg.

While economists generally support the idea of a tax cut for ordinary Americans, the picture is more complicated when the government consistently spends above its means.

Unless lawmakers put a cap on their spending, tax cuts could lead to a decline in government revenue that widens the deficit in the long run.

To finance the growing deficit in the event of a tax cut, the government may have to sweeten the pot by offering bond investors higher interest rates.

This was corroborated by a 2019 study by the Congressional Budget Office, which found that every 10% increase in the debt-to-GDP ratio leads to an incremental rise in interest rates paid to investors.

Ultimately, though, higher deficits may eventually force policymakers to raise taxes. According to the Committee for a Responsible Federal Budget, the deficit is expected to surge regardless of who wins the White House after the November election.

Under Kamala Harris, the deficit is projected to increase by $3.5 trillion over the next decade, while Trump’s presidency could send it soaring by $7.5 trillion.

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