Like many Americans, the federal government is shelling out a lot more money to cover interest payments on its debt after a series of Federal Reserve rate hikes over the past year.
The Treasury Department paid a record $213 billion in interest payments on the national debt in the last quarter of 2022, up $63 billion from the same period a year earlier.
The fourth-quarter tab was also nearly $30 billion more than in the prior quarter, which is the largest quarterly increase on record, said Jerry Dwyer, an economics professor emeritus at Clemson University.
Borrowing costs are expected to become an increasingly heavy burden in coming years. The Congressional Budget Office is set to provide its latest estimate on Wednesday.
The surge is due mainly to the Federal Reserve raising interest rates by 4.25% between March and December. The central bank increased the rate another quarter point in February.
Until recently, it cost the federal government very little to issue debt to finance its operations.
“It was almost free money,” Dwyer said. “You could borrow a trillion dollars, and if you financed it with Treasury bills, you paid almost no interest. But interest rates weren’t going to stay there forever.”
The national debt is once again in the spotlight now that the US has hit its $31.4 trillion debt ceiling, forcing Congress to take action or risk a catastrophic default. The Treasury Department is taking extraordinary measures to allow the government to continue paying its bills in full and on time, which it expects to last at least until early June.
The spike in interest payments also contributed to the federal government hitting the debt ceiling that much faster. And it adds to the pressure on Congress to raise taxes, cut spending or allow the government to borrow more to meet all its obligations.
Higher interest payment in coming years
Even if the Federal Reserve slows or stops raising rates this year, as many economists expect, the nation’s borrowing costs will continue to increase. That’s because as the existing debt matures, the government issues new debt with the higher prevailing interest rates.
The higher rates could increase the net interest cost on the national debt to about $9 trillion over the next decade, according to estimates by the Peter G. Peterson Foundation, a nonpartisan organization that seeks to raise awareness of America’s long-term fiscal challenges. That’s up from the record $8.1 trillion that the CBO projected in May 2022 and the $5.4 trillion it projected in July 2021.
By 2032, interest costs will triple to more than $3 billion per day and to at least $9,400 per household, on average, according to the foundation. They are on track to become the largest federal budget item, surpassing Social Security and Medicare by the middle of the century.
“Having rapidly growing interest makes it much more difficult for government to fund all the things that are important to our society,” said Michael Peterson, the foundation’s CEO.