The Growing Burden of Old National Debt

Although the debt ceiling debates, like the one currently taking place in Washington D.C., are nothing new, there is something unique about this one that makes it more of a cause for concern than the ones that came before.

That something is the escalating cost of financing the U.S. government’s outstanding debt. Economist Gerald P. Dwyer explains:

Consumers and businesses aren’t the only ones feeling the pain of higher borrowing costs because of Federal Reserve rate hikes. Uncle Sam is, too.

The U.S. government spent a record US$232 billion in interest payments on its debt in the first quarter of 2023, over 50% more than a year ago and over three times what it paid in the same period of 2003. That comes as the Fed lifted interest rates a whopping 5 percentage points beginning March 2022, including a quarter point on May 3, 2023.

As an economist, I am concerned that the effect of higher interest payments on the government’s budget is being ignored – even as the debate over raising the debt ceiling puts a spotlight on the growing national debt.

Higher interest payments mean the federal government will either have to lower spending, raise taxes or issue more debt to service its obligations. And financing interest payments by issuing more debt could be a particularly poor choice – sooner or later, the bill will come due.

Interest payments on the national debt have become the fastest-growing category of government spending. But is $232 billion a big number in terms of the U.S. government’s other spending?

It is when you compare it with the biggest discretionary spending category in the U.S. government’s budget. Author and radio host Mark Moss tweeted a chart showing that the federal government’s cost of financing the national debt will soon exceed defense spending.

This confirms that the cost of financing the U.S. national debt is a huge number that is rapidly growing.

Why is that big number a bad thing?

Now for the really scary part. Most of the increase in the cost of financing the national debt has happened because of rising interest rates. Those costs will keep growing, even without additional interest rate hikes.

That’s because much of the national debt borrowed at considerably lower interest rates will soon be maturing. During FY 2023, $6.7 trillion of that outstanding debt will come due and must be rolled over. As the debt gets rolled over, it will be refinanced at today’s much higher interest rates.

The U.S. government will keep doing that as another $22+ trillion in old debt comes due and needs to be refinanced in 2024 and 2025. The cost of paying interest on the existing national debt will keep getting higher.

All this doesn’t include any new debt that would need to be taken out to fund the U.S. government’s ongoing excessive spending. All that money will be borrowed from the get-go at today’s much higher interest rates.

Regardless of what happens with 2023’s debt ceiling negotiations, the growing burden of old debt will not go away anytime soon.

Craig Eyermann is a Research Fellow at the Independent Institute.
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