The federal government spent $475 billion on net interest payments to service the national debt during the last fiscal year, according to a report from the Treasury Department, surpassing the $425 billion in total revenue received from corporate income taxes and the combined value of both veterans’ benefits and transportation. Moody’s Analytics forecasts that interest payments could surpass defense spending, which amounted to $767 billion last year, by 2025 or 2026 as interest rates and borrowing continue to soar.
Indeed, a low interest rate environment had enabled the federal government to borrow money at a relatively inexpensive rate. However, as the Federal Reserve recently began hiking the target federal funds rate in an attempt to battle rising price levels, interest rates across the economy have increased precipitously.
The federal government surpassed $31 trillion in national debt last month after both Republican and Democratic administrations oversaw periods of increasing deficit spending. Although President Barack Obama maintained budget deficits as large as $1.4 trillion during his first term, President Donald Trump ran a deficit nearing $1 trillion in 2019, the year before the deficit more than tripled to $3.1 trillion as a result of lockdown stimulus spending, according to data from the Office of Management and Budget. President Joe Biden has since argued that the nominal reduction in the deficit to $1.4 trillion, which still exceeds all but one pre-lockdown deficit, under his watch is a major accomplishment of his administration.
Net interest costs have ranged between 1.2% and 3.2% of gross domestic product over the past half century, yet rising debt and interest rates could lead to costs reaching 3.3% of output by 2032 and 7.2% of output by 2052, according to a report from the Congressional Budget Office. The agency predicted that rising interest rates alone will account for half of the projected growth in net outlays for interest.
Beyond constraints to federal spending, the increasing necessity to pay interest on the national debt will crowd out private sector growth as the economy’s lending capacity is overshadowed by government obligations. David Bahnsen, the founder of Manhattan-based wealth management firm The Bahnsen Group, told The Daily Wire that “even if there ends up being downward pressure on interest rates, the mere existence of the much higher debt principal assures us of significant diversion of resources in the future away from productive parts of the economy” and toward the service of government debt.
“Two things cause an adverse reaction from excessive government debt,” Bahnsen continued. “First, companies and allocators of capital know that there is a need to service debt in the future and extract revenues from the private sector, and consequently invest less into productive activities. Second, the actual allocation of capital itself represents a downgrade of productive use — from the profit motive to the inefficiencies of government use. Muted growth becomes the best-case scenario and contraction becomes a real possibility.”
Bahnsen added that “the real mess” occurs as fiscal and monetary policymakers attempt to stimulate the economy in response to lower output. “More government spending or more monetary accommodation become morphine to the patient, creating an ever-diminishing return, and enhancing a spiraling negative feedback loop that worsens productivity and growth,” he remarked.