America
Rising Interest Rates Threaten Fed Solvency
O
A decade from now, the $1.2 trillion cost of annual interest payments will exceed entire defense budget. BY BRIAN RIEDL
ver the past two decades, falling inter- est rates have saved Washington trillions of dollars on its debt payments and brought com- placency regarding the escalating federal debt.
Now infl ation is pushing up interest rates — threaten- ing to bury the federal budget, with damaging economic consequences.
Rising infl ation does not, by itself, dramatically damage the federal budget. It produces more tax revenue and automatically raises federal spending formulas.
The real danger comes from permanently higher interest rates that persist long after infl ation has been defeated.
For the past few years, short-sighted lawmakers, economists, and columnists have demanded that Con- gress take advantage of low interest rates by engaging in a massive borrowing spree.
Indeed, President Joe Biden’s enormous spending agenda was often justifi ed by the low interest rates on government borrowing.
But this case never made sense for two reasons.
First, Washington was already projected to add $100 trillion in baseline defi cits over the next three decades due primarily to Social Security and Medicare shortfalls. Second, Washington
never
locked in the recent low interest rates. Nearly the entire escalat- ing national debt will roll over into higher interest rates within a decade.
Unfortunately, we are now
getting a taste of the federal cost of higher interest rates brought by infl ation. In early 2021, the Congressional Budget Offi ce projected
that the average interest rate paid by the Treasury on the federal debt would gradually rise from 1.5% to 2.4% over the next decade. Now, they project that rate to rise to 3.1% over that period. As a result, the latest CBO budget baseline forecasts
30 NEWSMAX | NOVEMBER 2022
that a decade from now, the $1.2 trillion cost of annual fed- eral interest payments will exceed the defense budget and represent a record 3.3% of the economy. What if the government’s interest rate surpasses the
CBO’s projected 3.1% rate a decade from now? Each additional percentage point would cost the fed- eral budget $2.6 trillion over the decade, and $400 billion annually by 2032. That would far exceed the cost of the 2017 tax cuts and approach the cost of Biden’s original Build Back Better
proposal.
It would be enough money to double federal spending on veterans’ healthcare as well as highways and transit, and still off er families a $300 annual tax rebate. Instead, that taxpayer expense would merely pay bondholders. And that is all from just one percentage point in higher interest rates.
Over the next three decades, inter-
est rates exceeding the CBO projec- tion by even 1% would add $30 trillion in additional interest costs — which is the equivalent of funding an additional defense department.
Within three decades, interest would
consume 70% of annual taxes, drive budget defi cits to 18% of the economy, and push the national debt to nearly 250% of the economy.
Washington is gambling its fi scal future on the hope that interest rates paid on its debt will never again reach levels like the 5% rate that prevailed as recently as 2008. There is no backup plan if interest rates rise.
If the debt truly expands by $114
trillion over the next three decades, as projected in the CBO baseline, then any small interest rate rise will bring
enormous costs. And the Social Security and Medicare shortfalls driving
this baseline debt surge will not be easily reversible with 74 million retiring baby boomers reaching their 70s and 80s over that period and increasingly unable to absorb any signifi cant reforms to these programs.
Brian Riedl is a senior fellow at the Manhattan Institute.
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