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US federal budget passes grim milestone as interest payments outpace defense spending
The United States has long had the largest defense budget in the worldwith spending this year expected to approach US$900 billion.
However, these expenses are quickly being eclipsed by the fastest-growing part of federal outflows: interest payments on the national debt.
For the first seven months of fiscal year 2024, which began last October, net interest payments totaled $514 billion, exceeding defense by $20 billion. Budget Analysts I think this trend will continuemaking 2024 the first year in which the United States will spend more on interest payments than on national defense.
Just two years agointerest payments were the seventh highest federal spending categorybehind Social Security, health programs other than Medicare, income assistance, national defense, Medicare and education.
Interest is now the third largest expense, after Social Security and healthcare. And not because any of the other programs are shrinking. Although most government expenses grow modestly from year to year, interest expenses in 2024 are 41% higher than in 2023.
Interest payments are rising for two obvious reasons.
The first is that annual deficits explodedleaving the nation with gigantic $34.6 trillion in total federal debt156% higher than the national debt at the end of 2010.
In the 1990s, the average federal deficit was $138 billion per year. In the 2000s, it was US$318 billion. In the 2010s, it was US$829 billion. Since 2020, the annual deficit has increased to $2.24 trillion, largely due to pandemic-related stimulus measures in 2020 and 2021. projection for 2024 it is a deficit of 1.5 billion dollars.
As a percentage of GDP, the annual deficit has almost doubled in just 10 years, from 2.8% in 2014 to a projected 5.3% in 2024. Therefore, there is much more borrowing to pay interest.
The government is also paying more to borrow as interest rates have soared over the past two years. Like consumers who buy houses and cars, Uncle Sam benefits from cheap money when rates are low and bears a heavier burden when rates are high.
From 2010 to 2021, the average interest rate on all Treasury bonds sold to the public was just 2.1%, which helped keep total interest payments manageable.
But in 2022, the Federal Reserve began raising rates to control inflation and the government now pays an average interest rate of 3.3%. Thus, the amount of money borrowed continues to increase and the cost of borrowing that money also increases.
More taxpayer money going to interest expenses will end up leaving less money for everything else, and at some point the Treasury will no longer be able to borrow its way out of the problem.
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It is an unsustainable situation, which could lead investors to lose faith in the government’s solvency and demand even higher rates to buy Treasury bonds.
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The urgency of the problem, however, is open to debate.
At the recent Milken Institute conference in Los Angeles, luminaries like billionaire investor Ken Griffin and former House Speaker Paul Ryan warned of an impending debt crisis if government interest costs continue to rise. But many prominent financiers also praised the United States as the best investment destination in the world, despite all its problems.
AND many predictions of a debt crisis, when interest expenses were much lower, have so far turned out to be wrong.
Soldiers stand in front of a US Air Force F-22 Raptor fighter jet during a briefing in a hangar at US Spangdahlem Air Base, Germany, September 3, 2015. (REUTERS/Ina Fassbender) (REUTERS/Reuters)
Two people who appear unfazed by the U.S. debt burden are President Joe Biden and former President Donald Trump, the two leading candidates in this year’s race for the White House. Nor is he making deficit reduction a focus of his presidential campaign.
Biden has a plan of sorts. He increase taxes on corporations and the rich and use part of these revenues to reduce annual deficits. But Biden also wants to spend more on social programs, which could offset any savings.
Trump says he would encourage more oil and natural gas exploration, which would somehow produce a tax windfall that would pay off the debt. But have no obvious way this would happenno matter how much drilling occurs.
Furthermore, both men presided over a huge increase in the national debt.
The national debt increased by $7.8 trillion during Trump’s four years as president and by $6.8 trillion during Biden’s first three years and four months.
Earlier this year, the Committee for a Responsible Federal Budget helped Yahoo Finance analyze who is responsible for the national debtand the blame falls more or less equally on administrations of both parties who borrow to finance wars, tax cuts, spending programs, and stimulus measures during recessions.
When the time comes to fix the debt, the inevitable solution will be a combination of spending cuts and tax increases that will leave many people unhappy.
Which reveals the real reason why no politician wants to solve the problem – everyone expects him to be the guy behind them.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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