News Mar 04, 2024 04:10 AM EST

Interest Surge vs. National Security: Should the US Prioritize Debt or Defense?

By April Fowell

The impact of rising interest rates, which make it more costly to carry credit card debt or purchase homes and vehicles, is well known to Americans. However, the federal government is also suffering: interest payments on the nation's debt are now the budget item expanding at the quickest rate and are even expected to surpass defense expenditure this year.

(Photo : by Win McNamee/Getty Images)
The impact of rising interest rates, which make it more costly to carry credit card debt or purchase homes and vehicles, is well known to Americans.

According to a recent estimate by the Congressional Budget Office, federal expenditure on interest payments is expected to reach $870 billion this year, surpassing the $822 billion that the country would spend on military in 2024. The interest expenditure for this year is 32% more than the $659 billion interest charge for the previous year.

Indeed, there are other factors besides only increasing interest rates that are driving up the cost of repaying the nation's debt. According to Treasury figures, the U.S. has nearly quadrupled its outstanding debt over the past ten years, with debt reaching $33 trillion last year from $17 trillion in 2014.

The tax cuts that former President Donald Trump implemented in 2017 and the increase in government help to sustain the economy during the pandemic-support that was approved by both Trump and President Joe Biden-are the main causes of the country's spiraling debt. Furthermore, the United States is paying more for its mounting debt as a result of the Federal Reserve using higher interest rates, its most potent weapon against inflation.

As far as some policy experts are concerned, that's taking the United States into unknown waters. The issue, they argue, is that the country's growing debt and interest payments may eventually put a strain on federal expenditures, making it more difficult to finance essential programs like Social Security or to make investments in projects like infrastructure or education that spur economic growth.

Marc Goldwein, the senior policy director at the Committee for a Responsible Federal Budget, a bipartisan think tank, highlighted the significance of interest payments on the federal debt. He emphasized that interest is projected to become the second-largest federal program this year, suggesting that tax dollars will increasingly be allocated towards servicing debt rather than funding other government initiatives. Goldwein noted that interest payments are on track to surpass even the defense budget, indicating the magnitude of this financial obligation.

Read also:Global Growth Grinds to a Halt as World Bank Predicts Third Year of Slowdown

Impact of Rising Interest Payments on U.S. Debt

In 2023, interest payments on the U.S. debt amounted to 2.4% of GDP, with projections from the Congressional Budget Office (CBO) estimating an increase to 3.9% by 2034. This upward trend underscores the growing financial burden posed by servicing the national debt.

Bobby Kogan, senior director of federal budget policy at the Center for American Progress, pointed out that, despite the catastrophic implications, it is incorrect to directly equate interest payments to expenditure on military or programs like Social Security.

First of all, interest payments are linked to funding authorized expenditure, meaning that the funds represent previous decisions made by politicians to forgo tax increases or cut back on important government initiatives.

Secondly, increasing interest expenses does not mean reducing programs. "It's not true that if interest is higher it's impossible to spend a dollar more on nutrition assistance," he stated. "The idea that this interest is crowding out other government spending isn't mechanically definitively true in any sense."

According to experts, the country's mounting debt and interest expenses may influence the 2024 presidential election. Republicans have attempted to pin the Biden administration's excessive spending on the epidemic on it, claiming it drove inflation higher. Economists attribute the price increase to a number of things, such as labor shortages, supply-chain bottlenecks, geopolitical issues like Russia's conflict with Ukraine, and expenditure initiatives from both the Trump and Biden administrations.

Republican members of the House Ways & Means Committee contend that the interest rate rises that followed from the Fed have increased the cost of interest on the country while also hurting households and small businesses. The Republican senators said in a statement released in December that "inflationary spending sprees by Democrats and President Biden are the direct cause of rising interest rates and the associated cost of servicing federal debt."

When the Fed starts lowering rates, which is anticipated to happen later this year, the United States may experience some respite similar to what American consumers do. However, Goldwein cautioned that since the US is poised to accrue more debt, the country can yet find itself caught in a never-ending cycle of rising interest rates.

Related article:Is the Dollar Too Strong? Analysts Warn of Potential Risks

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