The United States federal government’s debt burden is becoming less sustainable as interest rates soar and large budget deficits persist. At the end of September, the federal government recorded a $1.7 trillion deficit, the third largest in US history, trailing only the $3.1 trillion and $2.7 trillion deficits incurred in FY2020 and FY2021, respectively, during the pandemic-era relief program spending.
Interest rates in the United States have recently soared to their highest levels in 22 years, resulting in a surge in the cost of servicing national debt, which now totals more than $33 trillion. The federal government spent $659 billion on interest payments in FY2023, over $200 billion more than the Congressional Budget Office (CBO) had anticipated for FY2023 in projections released in May 2022.
A nonpartisan report released by the United States Congressional Research Service (CRS) on Monday noted that the new interest rate environment could hasten the “tipping point” at which persistent and harmful GDP growth would occur or when an imminent default on the debt becomes inevitable. The report stated that it is unclear at what point the nation’s debt burden would become unsustainable, but it falls within the range of more pessimistic projections according to the current CBO forecasts, with the debt on a growth trajectory.
The CRS report also noted that economists are not in agreement as to when the debt-to-GDP ratio will reach unsustainable levels. Debt-to-GDP ratios of 80% to 200% and higher have been estimated. The current publicly held debt-to-GDP ratio is predicted to cross the 100.4% mark in FY2024 before skyrocketing to 180.6% by FY2053, according to the Congressional Budget Office.
The recent changes and trends in economic conditions have brought debt sustainability to the forefront of several policy debates. According to the CRS report, “these other concerns include, but are not limited to, whether the country is investing enough in physical and human capital to support future economic growth; the country’s social safety net programs rapidly approaching insolvency and the rising costs of healthcare fueling long-term budget challenges.”
As the United States prepares to begin a new fiscal year in October, discussions surrounding the debt burden and its sustainability are likely to continue among policymakers. Biden administration officials have consistently stated that they believe infrastructure investment, heightened taxes on corporations and wealthy individuals, and reducing the deficit over time would lead to a stronger long-term fiscal position for the nation.