Soaring interest costs to exceed defense spending as government faces fiscal reckoning

Soaring interest costs are set to exceed all defense spending this year, with the gap only growing over the next decade as lawmakers stare down major fiscal problems.

This year, the United States will be shackled with $870 billion in payments on net interest. That is nearly 5.7% more than the $822 billion the government will spend on national defense, according to budget projections from the Congressional Budget Office.

Interest costs exceeding annual defense costs for the first time is an indication of the problems that will arise thanks to borrowing that soared during the pandemic and has remained high even as the economy has recovered.

The government shells out more money, by far, on its military and defense than any other country in the world. Yet, that category of spending is set to be far exceeded by payments on the debt. A decade from now, in 2034, annual interest costs are projected to be a whopping $1.6 trillion. That is a staggering 45% higher than the U.S. is forecast to spend on defense in the same year.

“Long term, interest is going to be the biggest part of the federal budget and could cost as much as half to three-quarters of all taxes,” said Brian Riedl, a budget expert at the right-leaning Manhattan Institute. “Interest costs have already passed Medicaid, they are passing defense this year, by 2028 they will exceed Medicare, and by 2042 they will exceed Social Security to become the most expensive part of the budget.”

Net interest costs as a share of gross domestic product are also rising. In 2023, net interest made up 2.5% of GDP. That will balloon to nearly 4% of GDP by the end of the coming decade. Meanwhile, discretionary defense spending will fall from about 3% of GDP to 2.5%, according to the CBO projections.

Borrowing costs have risen very quickly over the past few years as inflation took off and the Federal Reserve raised its interest rate target. Higher rates mean the government needs to pay more in interest to borrow, a reality that has heightened the urgency for lawmakers to act.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a group that favors lower deficits, told the Washington Examiner that for years interest rates stayed “stunningly low,” leading to some analysts encouraging the federal government to borrow and spend.

“So here we are at a moment when we are reminded of reality, that extra borrowing leads to higher interest rates, but because we did indeed borrow more and because we were hit with the crisis of [the pandemic], every small increase in interest rates is a very significant increase in our interest payments,” she said.

MacGuineas emphasized that the government is highly sensitive to interest rate increases.

Years of ultralow interest rates, which saw the yields on 10-year Treasury securities falling well below 1% during the pandemic, had allowed the federal government to take on huge amounts of debt with fewer ramifications.

“Congress and the White House went on a long-term borrowing spree on the belief that interest rates would never rise again,” Riedl told the Washington Examiner. “Essentially, Congress and the White House gambled our long-term solvency on interest rates staying low forever. The fact that interest rates are now rising is combining with a soaring national debt to create a potentially calamitous set of costs.”

Federal debt is also rising, and fast. In March, the CBO said federal debt held by the public will balloon to 107% of the country’s GDP by 2029, the highest level on record. It will then grow to 166% by 2053.

MacGuineas pointed out that the fiscal reckoning and higher interest costs come at a time of geopolitical tension and friction across the globe.

For instance, since Russia invaded Ukraine in early 2022, the two countries have been in an entrenched war that still threatens to pull in other countries and further destabilize Europe. Last year, Hamas terrorists launched a brutal attack against Israeli civilians and set off the biggest military escalation in the region since the Yom Kippur War more than a half century ago.

Add to that the growing military competition between the U.S. and China and uncertainty with Taiwan, and the federal government’s fiscal problems become more worrying.

“At a time where our huge interest payments are starting to dwarf many of our government programs and even eclipse defense spending, it demonstrates how dangerous it is to be overindebted as we are when you may need your budget for other purposes,” MacGuineas said. “Right now is a time where we would want to be thinking about global strategy.”

“But our hands are tied because of these huge interest payments and they are only going to grow … until we make dramatic shifts,” she added.

To lower borrowing, lawmakers would have to make some politically unpopular decisions, such as cutting popular programs or raising taxes, which could threaten their careers.

But there have been some steps in the right direction in recent months, according to budget experts.

House Speaker Mike Johnson (R-LA), in his first floor speech as leader of the House last year, used the opportunity to draw attention to the country’s financial situation. He proposed a bipartisan fiscal commission to lower deficits and debt.

“The consequences if we don’t act now are unbearable. We have a duty to the American people to explain this to them so they understand it well,” Johnson told fellow lawmakers. “We are going to establish a bipartisan debt commission to begin working on this crisis immediately,” Johnson added.

In January, the House Budget Committee voted to advance bipartisan legislation that would form a panel consisting of both Republican and Democratic lawmakers from both chambers of Congress, in addition to outside experts. The committee would work to produce a report and propose legislation that would stabilize the ratio of public debt to GDP to at or below 100% within 10 years.

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But a commission would only work if those involved are able to make decisions that may be very unpopular. Democrats and many Republicans have essentially said that programs like Social Security and Medicare are untouchable. Republicans also want to extend the 2017 Tax Cuts and Jobs Act, which forecasters say would cost an additional $3.5 trillion over the next decade.

“The projected debt is a massive ship that cannot be turned around very quickly,” Riedl warned on Tuesday.