For the First Time, the U.S. Is Spending More on Debt Interest than Defense

The Fed’s new “higher for longer” rate stance spotlights a looming problem for the U.S. economy: the growth of the federal debt.

Federal debt as a percentage of gross domestic product (GDP) is, at 97 percent, at an all-time high. And with annual budget deficits running at crisis-era levels—6.2 percent in 2023, a forecasted 5.6 percent for 2024—that debt is set on a relentless upward path.

What appeared to many, before the soaring of inflation to 8.9 percent in June 2022, to be a new era of cheap money, extending across the temporal horizons, now appears to have been an anomaly superseded by geopolitical and global-aging trends unfriendly to borrowers. In the left-hand graphic above, we show that new Congressional Budget Office projections of annual federal government net interest costs as a share of federal outlays are an enormous five percentage points higher than they were back in 2019, just prior to the COVID-19 pandemic.

What does this mean for the United States?

The likelihood of the U.S. actually defaulting on its debt is trivial, since the government prints the currency in which its debt is denominated. But the alternatives to default under the path of continued high deficits all point toward lower living standards. As the government borrows more and more, the cost of money across the economy increases, crowding out private investment, reducing supply, increasing prices, and lowering growth. In the worst-case scenario, the country enters a debt spiral in which government borrowing and interest rates each keeps pushing the other up.

For the government itself, this means interest on the debt slicing more and more into the funds available for national spending priorities. To illustrate this, our right-hand graphic shows that interest outlays on the federal debt this year surpassed defense outlays for the first time in the nation’s history. Still, neither major political party is talking seriously about the mix of spending cuts and tax rises that ought to be enacted now—before crisis forces our hand. We would like to see the presidential candidates forced to address the matter during their forthcoming June 27 debate.