United States

U.S. on a Course to Spend More on Debt Than Defense

In the past decade, U.S. debt held by the public has risen to $15.9 trillion from $5.1 trillion, but financing all of that debt hasn’t been a problem. Low inflation and strong global demand for safe U.S. Treasury bonds held the government’s interest costs down.

That’s in the process of changing.

Interest rates are rising as inflation normalizes around the Federal Reserve’s 2% target. That and the sheer scale of debt being accumulated by the federal government has put the U.S. on a path of rising interest costs that in the years to come could crowd out other government spending priorities and rattle markets.

In 2017, interest costs on federal debt of $263 billion accounted for 6.6% of all government spending and 1.4% of gross domestic product, well below averages of the previous 50 years. The Congressional Budget Office estimates interest spending will rise to $915 billion by 2028, or 13% of all outlays and 3.1% of gross domestic product.

Along that path, the government is expected to pass the following milestones: It will spend more on interest than it spends on Medicaid in 2020; more in 2023 than it spends on national defense; and more in 2025 than it spends on all nondefense discretionary programs combined, from funding for national parks to scientific research, to health care and education, to the court system and infrastructure, according to the CBO.

From defense to Medicaid, in other words, it will become a bipartisan challenge. The early 1990s were the last time the government’s interest expenses were high and rising. Back then, Washington politicians routinely worried about “bond market vigilantes” on Wall Street who threatened higher costs on debt if deficits weren’t contained.

To confront the problem, President George H.W. Bush did a budget deal with Democrats that raised taxes on the wealthy, alienating Republicans and undermining his chances for a second term in office. President Bill Clinton abandoned campaign promises of a big fiscal stimulus program.\

Read more at Morningstar

About the author

Kate Davidson and Daniel Kruger