The Federal Reserve raised a key interest rate on Wednesday and signaled that more rate hikes are likely this year. Increased interest rates mean that it will be more expensive to finance the national debt. Coupled with growing debt, the result will be an explosion in interest on the debt, which will crowd out critical investments.
With interest rates currently relatively low, the federal government still pays more in interest on the debt than it spends on the Departments of Homeland Security and Veterans Affairs combined. It also spends more on debt interest than on the Departments of Education, Labor, Transportation, and Housing and Urban Development combined.
The combination of rising interest rates and mounting national debt will cause interest payments to skyrocket in the years to come, doubling as a share of the economy in the next decade and nearly tripling in dollar terms. In fact, interest on the debt will be the fastest growing part of government spending.
Increased interest payments will crowd out parts of the federal budget that can help grow the economy and improve the standard of living for all Americans, such as investments in education, infrastructure, basic research, and support for low-income families. In effect, instead of investing in our future, we are making future generations pay for our current consumption.
In testimony before Congress earlier this year, Federal Reserve Chair Janet Yellen warned that deficits and debt are on an unsustainable path.
I think we've known for many, many years that the U.S. fiscal trajectory is not sustainable, and the Congressional Budget Office's most recent forecasts show deficits increasing over the next 10-year period under their baseline.
I do think it's worth pointing out that fiscal sustainability has been a long-standing problem, and that the U.S. fiscal course, as our population ages and health care costs increase, is already not sustainable.
National Debt and You