This year, the federal government will spend$300 billionon interest payments on the national debt. This is the equivalent of nearly9 percent of all federal revenue collectionandover$2,400 per household.
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The federal government spends more on interest than onscience, space, and technology; transportation;and educationcombined. The household share of federal interest is larger than average household spending on many typical expenditures, including gas, clothing, education, or personal care.
Despite historically low interest rates, this significant interest cost is the result of high levels of debt. This cost could be even worse if interest rates rise. Each one percent rise in the interest rate would increase FY 2021 interest spending by roughly $225 billion at today’s debt levels. Growing debt levels not only add to the likelihood of such increases, but also the cost and risk associated with them.
This brief puts these interest payments in context. Estimates are based on CBO’s February 2021 baseline and do not incorporate the effects of the American Rescue Plan.
How Much Does the Federal Government Spend on Interest?
Evenwith exceptionally low interest rates, the federal government is projected to spendjust over $300 billionon net interest payments in fiscal year 2021.This amount is more than it will spend on food stamps and Social Security Disability Insurance combined. It is nearly twicewhat the federal government will spend on transportation infrastructure, over four timesas much as it will spendon K-12 education, almost four times what it will spend on housing, and over eight times what it will spend on science, space, and technology.
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While such a large interest rate hike is unlikely to occur in such a short period of time,it may very well occur over time. Rate increases would be more expensive if they took place further in the future, since higher debt increases their cost. The higher the federal debt,the more exposed the federal government is to interest rate risk.
While interest rates on the national debt are low historically speaking, the sheer amount of debt means that the federal government still spends billions of dollars on interest payments every year. These payments are larger than many federal government programs. Plus, because the debt we hold today will carry over into future years, there is considerable risk that higher potential future rates will result in interest payments that crowd out spending on even the largest government programs and priorities.
Given this risk, it would be prudent to address our long-term structural debt issues sooner rather than later. Once the U.S. recovers from the COVID-19 pandemic, policymakers should work to adopt a combination of entitlement reforms, smart spending reductions, and revenue increases that will ultimately put debt and deficits on a more sustainable path.
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Note: An earlier version of this paper erroneouslylisted Science, Space, and Tech expendituresas R&D spending. This paper has also been updated to clarify changes in interest rate are on a percentage point basis.