Interest on the federal debt will eclipse total defense spending in the next five years, the Congressional Budget Office projected Monday, a reflection of the size of the large and growing federal debt.
The CBO, Congress’ nonpartisan group of budget and economic analysts, reckoned that the combination of tax cuts and spending increases over the past year will result in the federal debt rising from around three-quarters percent of the country’s gross domestic product today to between 96 percent and 105 percent in 2028. As a result, interest costs would rise from $316 billion this year to $915 billion by 2028.
By 2023, spending just to make payments on the debt would exceed spending on national defense, with Uncle Sam coughing up $702 billion to pay the debt service but only $679 for the Pentagon.
As soon as 2020, interest spending would eclipse federal Medicaid spending, at $485 billion versus $417 billion.
The possibility of interest costs crowding out other government priorities is a prospect that fiscal conservatives in Congress have said raises the urgency of lowering deficits by cutting spending or increasing taxes.
But the CBO also sees interest rates remaining low on Treasury securities, never returning to pre-financial crisis norms. That means that the government will still be borrowing relatively cheaply, even if it’s borrowing a lot.
Overall interest costs, relative to GDP, have been low in recent years, compared to past decades, even as the government’s fiscal situation has deteriorated.
Even with deficits in the trillions of dollars, the CBO expects debt service costs not to explode too far beyond historic norms in the decade ahead. As a share of GDP, interest costs will rise to 3.1 percent by 2028. That’s where they were in 1991.
Of course, those projections could change if interest rates do spike. In that scenario, the government could face hard choices on the budget.
At least one other rich nation has driven its debt way up without interest costs soaring out of control — at least not yet. Japan’s federal debt is more than twice the size of its economy, and yet rates are still so low that the government gets paid to borrow for short periods of time.
