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The effects of increasing interest rates are well-known to Americans, as they are leading to higher costs for maintaining credit card debt and purchasing homes and vehicles. However, the federal government is also facing consequences: the budget is seeing a rapid rise in interest payments on the nation’s debt, and is expected to exceed spending on defense this year.

According to the Congressional Budget Office’s recent analysis, federal spending on interest payments is projected to reach $870 billion this year. This amount is higher than the $822 billion that will be spent on defense in 2024. The budget for interest payments has risen by 32%, from $659 billion in the previous year.

One thing to keep in mind is that the increase in interest rates is not the sole reason for the rise in the cost of managing the national debt. Treasury data shows that in the past 10 years, the U.S. has nearly doubled its total debt, reaching $33 trillion in 2020 compared to $17 trillion in 2014.

The tax reductions passed by ex-President Donald Trump in 2017, along with the increase in government assistance to support the economy during the pandemic (approved by both Trump and President Joe Biden), have resulted in an additional burden on the United States’ mounting debt. Furthermore, the Federal Reserve’s decision to utilize higher interest rates as a powerful measure against inflation has further escalated the cost of this debt.

Some experts in government policy believe that the actions being taken are leading the United States into unfamiliar territory. The issue at hand, according to them, is that the country’s increasing debt and interest obligations may eventually limit federal spending, making it more difficult to finance important programs like Social Security and important investments in things like infrastructure and education that contribute to economic growth.

“The projected amount of money going towards interest this year is expected to be the second highest in terms of federal programs. This means that your tax dollars will be allocated towards interest rather than other areas,” stated Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, a bipartisan think tank.

“He stated that, to his knowledge, the defense budget has always been greater than the level of interest.”

Last year, U.S. interest payments on its debt amounted to 2.4% of GDP, and the CBO projects that will increase to 3.9% by 2034. 

Although it may seem concerning, it is not accurate to directly equate expenses for programs such as Social Security or military defense with interest payments, as stated by Bobby Kogan, senior director of federal budget policy at the Center for American Progress.

For one, interest payments are tied to financing for approved spending — in other words, the money reflects lawmakers’ earlier decisions to avoid tax hikes or slash key government programs.

According to CBS MoneyWatch, many people believe that paying interest is a foolish use of money. However, Kogan argues that this is not the case. He explains that the choice to pay interest is ultimately a result of choosing not to raise taxes or decrease spending.

Furthermore, increasing spending on interest does not necessarily mean reducing spending on programs. The statement “If interest rates are higher, it is impossible to spend an additional dollar on nutrition assistance” is not factual, according to the individual. The notion that interest payments are limiting other government expenditures is not necessarily backed by any concrete evidence.

$37,100 per person

Another important aspect to take into account is that the country’s financial future is currently in a more favorable condition compared to the estimates made by the CBO last year. This can mainly be attributed to…stronger-than-expected economic growth

According to senior officials from the Biden administration who spoke with CBS MoneyWatch, the United States has made progress in recovering from the pandemic.

In the recent report by the CBO, it was stated that the government’s budget shortfall for 2024 will be $63 billion less than what was projected almost a year ago. Additionally, the cumulative federal deficit for the next decade is expected to be $1.4 trillion lower than the initial estimate by the agency.

invest in infrastructure and social programs, are a way to address economic and social inequalities

The Biden administration views its initiatives to increase taxes for the wealthy and large corporations, as well as investing in infrastructure and social programs, as a means of tackling economic and social disparities.recoup billions

By conducting audits on wealthy individuals through the IRS, it will aid in generating more income to support important programs.Stronger GDP growth

They claim it is also aiding in reducing the deficit.

According to the Biden administration, Republican legislators could potentially worsen the country’s debt and interest payment complications by prolonging tax cuts implemented during the Trump presidency, which would result in an additional $3.5 trillion deficit until 2033. The 2017 Tax Cuts and Jobs Act currently includes various measures that contribute to these concerns.largely benefited

The tax cuts for wealthy individuals and corporations, which are set to end in 2025, may be extended if certain GOP politicians have their way.

According to the Peter G. Peterson Foundation, a think tank dedicated to reducing federal debt, the federal government is projected to spend $12.4 trillion on interest over the next ten years. This is the largest amount of interest spent in any 10-year period in history and equates to approximately $37,100 for every person.

The foundation stated that in 2023, the United States allocated a larger budget for interest payments than for Medicaid, a healthcare program for low-income individuals. They are advocating for politicians to establish a non-partisan fiscal commission to develop strategies for reducing debt and addressing other concerns.

“How the Federal Reserve plays a role in all of this”

According to experts, the country’s increasing debt and interest payments may impact the outcome of the 2024 presidential election. Republicans have accused the Biden administration of excessive spending during the pandemic, which they believe has led to inflation. However, economists attribute the rise in prices to various factors such as supply chain issues, shortages in labor, and global events like Russia’s conflict with Ukraine, as well as spending initiatives from both the Trump and Biden administrations.

The Fed’s increase in interest rates has been difficult for both families and small businesses. This has also led to an increase in the nation’s interest expense, according to Republican members of the House Ways & Means Committee. In a statement made in December, they argued that the rise in interest rates and the accompanying expenses to pay off federal debt are a consequence of President Biden and the Democrats’ excessive spending, which has caused inflation.

“Similar to how American customers may experience some alleviation, the United States may also witness some easing as the Federal Reserve starts to lower interest rates, which is anticipated to occur in the near future,” Goldwein cautioned. However, Goldwein expressed concern that the country may remain stuck in a pattern of continuously increasing interest payments as it continues to accumulate more debt.

According to him, increased debt results in higher interest, which then perpetuates more debt.

According to the CBO’s projections, the amount of debt and interest payments will rise in the next decade. Federal spending is expected to increase by 64% to $10 trillion, which is significantly higher compared to the $6.1 trillion in 2023. This increase in spending is largely attributed to mandatory programs such as Social Security and Medicare, as the aging U.S. population drives up their costs.

Goldwein believes that addressing the increasing national debt will necessitate a bipartisan effort to both generate more income through increased taxes and reduce spending.

According to him, it is impractical to address it from just one perspective.

Aimee Picchi

Source: cbsnews.com