Federal Net Interest Costs: A Primer
CBO describes federal net interest outlays and their projected growth over the coming decade.
In fiscal year 2020, the government’s net outlays for interest totaled $345 billion, equal to 1.6 percent of gross domestic product (GDP) and accounting for 5.3 percent of total spending. The interest the government pays on debt held by the public has remained low as a percentage of GDP, even though that debt has risen to historically high levels. Interest costs are projected to grow steadily as interest rates rise and the size of the debt increases. Although the federal government has increased its borrowing from the public by $12 trillion (or roughly 130 percent) in the past 10 years, net annual outlays for interest rose by $149 billion (or roughly 75 percent) because interest rates fell to historically low levels.
What Is Net Interest?
The government pays and collects interest in various ways. Net interest consists of the interest it pays minus the interest it receives. The outlays largely reflect the interest paid to holders of the debt that the Treasury issues to the public. Although the Treasury also issues debt to trust funds and other government accounts, the payment of interest to those accounts is an intragovernmental transaction that has no effect on the budget deficit.
The net interest costs shown in the budget include interest paid on all Treasury securities ($523 billion in 2020), minus the portion of that interest that is received by trust funds ($135 billion in 2020) and the net amount of other interest and investment income received by the government ($43 billion in 2020). The last category consists primarily of net receipts to the Treasury from the financing accounts that track the cash flows of federal credit programs (mostly student loans).
The federal government’s interest payments depend largely on interest rates and the amount of debt held by the public. Other factors, such as the rate of inflation and the maturity structure of outstanding securities, also affect interest costs. (For example, long-term bonds generally carry higher interest rates than do short-term bills.) Interest rates are determined by market forces, such as the supply and demand for Treasury securities, and the policies of the Federal Reserve.
What Are CBO’s Projections of Net Interest?
In the Congressional Budget Office’s most recent projections, which incorporate the assumption that current laws governing revenues and spending generally remain the same, the cumulative deficit from 2021 through 2030 totals nearly $13 trillion. Borrowing to finance that deficit—at a time when interest rates are expected to rise—would cause net interest outlays to more than double over the next 10 years, from an estimated $290 billion in 2021 to $664 billion in 2030. As a percentage of GDP, those outlays would increase from 1.4 percent to 2.2 percent over the period. For the majority of those 10 years in CBO’s forecast, interest rates remain historically low despite the rise in public debt.