Federal debt held by the public will reach about $12.8 trillion by the end of this fiscal year, an amount that equals 74% of the nation’s total output (gross domestic product, or GDP) this year. If current laws generally remained unchanged—the assumption that underlies CBO’s baseline projections— the Congressional Budget Office (CBO) projects that such debt would climb to $20.6 trillion, or 77% of GDP, in 2024.
Interest payments on that debt represent a large and rapidly growing expense of the federal government. CBO’s baseline shows net interest payments more than tripling under current law, climbing from $231 billion in 2014, or 1.3% of GDP, to $799 billion in 2024, or 3.0% of GDP—the highest ratio since 1996. The rising debt accounts for some of that increase, but much of it stems from CBO’s expectation that—largely owing to the improving economy—the average interest rate paid on that debt will more than double over the next 10 years, from 1.8% in 2014 to 3.9% in 2024. (Although interest rates are projected to rise sharply, CBO’s current projections of those rates are lower than its projections earlier in the year, reflecting the agency’s reassessment of the factors influencing real interest rates.)
This blog post highlights some of the discussion about federal interest costs in An Update to the Budget and Economic Outlook: 2014 to 2024, which CBO released last week.
Projected Federal Debt
Federal debt held by the public consists mostly of securities that the Treasury issues to raise cash to fund the federal government’s activities and to pay off its maturing liabilities. It does not include Treasury securities held by federal trust funds and other government accounts; interest payments on those securities are intragovernmental transactions, which appear in the budget as interest costs to the Treasury and receipts to the trust funds and other accounts, having no net effect on the federal deficit. (For more discussion, see CBO’s report Federal Debt and Interest Costs.)
The net amount that the Treasury borrows by selling securities to the public (the amounts that are sold minus the amounts that have matured) is influenced primarily by the annual budget deficit. In addition, the Treasury borrows to provide financing for student loans and other credit programs; the budget reflects the projected subsidy costs for those programs, rather than the cash disbursements. In its baseline projections, CBO projects that—if current laws generally remain unchanged—federal deficits would total $7.2 trillion between 2015 and 2024 and additional borrowing, often called “other means of financing,” would total roughly $560 billion during that period. After accounting for all of the government’s borrowing needs, CBO projects that debt held by the public would rise by $7.8 trillion between the end of 2014 and the end of 2024, an increase of more than 60%. The debt measured as a percentage of GDP would also rise, but not as dramatically because the economy will also grow over that period.
| CBO's Current and Previous Projections Related to Federal Interest Payments | ||||||||||||
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | ||
| Net Interest (Billions of dollars) | ||||||||||||
| August 2014 | 231 | 251 | 287 | 340 | 412 | 492 | 566 | 627 | 687 | 746 | 799 | |
| April 2014 | 227 | 266 | 323 | 400 | 491 | 567 | 635 | 694 | 755 | 818 | 876 | |
| Debt Held by the Public (Billions of dollars) | ||||||||||||
| August 2014 | 12,797 | 13,305 | 13,927 | 14,521 | 15,135 | 15,850 | 16,642 | 17,518 | 18,520 | 19,534 | 20,554 | |
| April 2014 | 12,740 | 13,285 | 13,884 | 14,523 | 15,202 | 15,977 | 16,835 | 17,769 | 18,823 | 19,885 | 20,947 | |
| Interest Rate on 3-Month Treasury Bills (Percent) | ||||||||||||
| August 2014 | 0.1 | 0.3 | 1.1 | 2.1 | 3.1 | 3.5 | 3.5 | 3.5 | 3.5 | 3.5 | 3.5 | |
| February 2014 | 0.2 | 0.4 | 1.8 | 3.3 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | |
| Interest Rate on 10-Year Treasury Notes (Percent) | ||||||||||||
| August 2014 | 2.8 | 3.3 | 3.8 | 4.2 | 4.6 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | |
| February 2014 | 3.1 | 3.7 | 4.3 | 4.8 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | |
| Average Interest Rate on Debt Held by the Public (Percent) | ||||||||||||
| August 2014 | 1.8 | 1.9 | 2.1 | 2.3 | 2.7 | 3.1 | 3.4 | 3.6 | 3.7 | 3.8 | 3.9 | |
| April 2014 | 1.8 | 2.0 | 2.3 | 2.8 | 3.2 | 3.5 | 3.8 | 3.9 | 4.0 | 4.1 | 4.2 | |
| Federal Funds Rate (Percent) | ||||||||||||
| August 2014 | 0.1 | 0.4 | 1.3 | 2.4 | 3.4 | 3.8 | 3.8 | 3.8 | 3.8 | 3.8 | 3.8 | |
| February 2014 | 0.2 | 0.4 | 2.0 | 3.6 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | |
| Notes: CBO's previous budget projections were released in April 2014. The agency's previous economic forecast was published in February 2014. The federal funds rate is the interest rate on overnight lending among banks, which is adjusted by the Federal Reserve as one of its principal tools for conducting monetary policy. Values for the interest rates on three-month Treasury bills and ten-year Treasury notes, as well as for the federal funds rate, are on a calendar year basis. Values for net interest, debt held by the public, and the average interest rate on debt held by the public are on a fiscal year basis. |
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Projected Interest Rates
Between calendar years 2014 and 2019, CBO expects, the interest rate on 3-month Treasury bills will rise from 0.1% to 3.5% and the rate on 10-year Treasury notes will rise from 2.8% to 4.7%; both are projected to remain at about those levels through 2024. After 2014, the projected 3-month Treasury rate is a bit below the projected federal funds rate—the interest rate on overnight lending among banks, which is adjusted by the central bank as one of its principal tools for conducting monetary policy—which rises to 3.8% by 2019 and remains at that level through 2024.
CBO expects that monetary policy will continue to support an improvement in economic growth during the next few years because some slack will persist in the labor market and inflation will stay below the Federal Reserve’s goal. (For highlights of CBO’s analysis of the labor market, see yesterday’s blog post, Slack in the Labor Market in 2014.)
The 10-year Treasury rate began rising from very low levels in 2012 and is currently close to 2.4%, still low by historical standards. That rate will be pushed up over time by market participants’ expectations of an improving economy, the rise in short-term interest rates, and an end to the Federal Reserve’s purchases of long-term Treasury securities and mortgage-backed securities, CBO anticipates.
The projected increase in market interest rates would affect the government’s borrowing costs as the Treasury replaced maturing debt and issued additional debt to finance budget deficits and for other means of financing. CBO projects that, under current law, the average interest rate on debt held by the public—calculated as net interest divided by debt held by the public—will rise from 1.8% this year to 3.9% a decade from now.
To read complete CBO blog post click here