Over the next ten years, the U.S. government is slated to spend slightly over $1 trillion on interest payments: the product of rising Treasury yields. In 2024 alone, interest is expected to cost the U.S. government nearly $870 billion (around 3% of GDP). As the chart below reflects, this will be one of the U.S. government’s largest budgetary expenses (even greater than defense spending). Pressure on government financing will be further exacerbated by rising entitlement spending, which the CBO expects to dominate the budget in the coming decade. Rising interest costs must be considered in this context.
The rising cost of America’s debt can be attributed to the environment spawned by the COVID-19 pandemic. As the Fed whittled rates to null, a consequent borrowing frenzy astronomically increased Treasury issuance ($23 trillion in 2023). Post-pandemic, as interest rates rose to relative highs surpassing 5%, the cost of issuance rose with it.
Some might argue that the impacts of a rising debt burden are not yet apparent. 2023 was a strong year for the U.S. economy. Rising equity prices have boosted market morale. However, this does not mean mounting debt is not an issue. What goes up must come down.
As the U.S. government pays more to service its debt, its deficit will inevitably increase. This creates a positively reinforcing cycle: the state must issue more debt so that it might raise money to fund deficit spending. This contributes to a higher rate environment overall, which crowds out consumer spending and business investment, leading to sluggish economic growth. While potential impacts are foreseeable, an easy solution is not. It involves enduring economic hardship now to avoid hardship later. Reducing the deficit either via tax increases or spending cuts will be painful and recessionary. It will likely not last, prompting growth-boosting policy responses that are only likely to further increase the deficit. The debt problem will force the U.S. to pick between a rock and a hard place.
Source: Eric Wallerstein, WSJ; Brian Riedl, Manhattan Institute
Reade Ben is a policy analyst at the Manhattan Institute.
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