According to projections put out by the Congressional Budget Office (CBO), government spending on servicing the interest on the national debt is set to increase by 70% in the next three years alone. The CBO projection is driven by two trends: 1) trillion-dollar deficits today and those projected in the President’s Budget; and, 2) rising interest rates and the Fed’s approximately $50 billion per month liquidation of its bloated balance sheet. Both phenomena will work in concert to drive interest rates higher just as the federal government will be looking for credit markets to absorb record amounts of debt at their treasury auctions. Unlike in 2008, the Federal Reserve will not be there to buy up much of that new debt — credit markets will have to do the work themselves, and the resulting siphoning of loanable funds to the federal government will drive interest rates even higher.
Spending on debt service is projected to increase three and a half times as fast as the next fastest growing program: spending on the national defense — which is set to increase 20% over the same time frame. CBO projects spending on interest payments to grow from $263 billion to $479 billion by 2020. Defense spending is set to grow from $634 billion to $716 billion. Debt service is fast approaching the same share of federal expenditures as the current big three of federal spending: Social Security, Medicare, and Defense. Each of these three spending priorities consume approximately 15% of the federal budget. Within ten years, debt service is projected to consume 13% of the budget, according to a worrying report from the New York Times entitled “As debt rises, the Government Will Soon Spend More on Interest Than on the Military.”
The fiscal and national security implications of these projections are obvious, but their importance warrants a brief examination.
First, from the fiscal standpoint, the federal government is currently running trillion-dollar deficits without a massive increase in the cost of debt service. If the future skyrocketing cost of debt service is not met with a corresponding reduction in other government outlays and/or an increase in revenues, then the debt will explode and initiate a vicious cycle where the high cost of servicing the debt necessitates further borrowing, which in turn further increases the cost of servicing the debt.
Second, the national security implications of a ballooning debt and cost of debt service is severe. If servicing the national debt grows to become a line item on par with Medicare and defense, then it leaves very little room to maneuver for either of those spending categories. If in ten years the United States were to find itself embroiled in some new conflict, the President and Congress would have few options when it came to financing the operation. With so much of the budget already absorbed by non-discretionary spending, the only options available will be to raise taxes significantly and massively blow out the debt again (and further accelerate the vicious cycle described above), or influence the Federal Reserve to print more money to buy up the flood of treasuries in credit markets. All of this would occur in the context of the US government maintaining defense spending levels as a percentage of GDP that are currently well behind the Russians, for example.
None of these options bode well for the long-term financial health of the United States, or for the ability of the President and the Defense Department to prosecute future conflicts. Getting the debt under control now is not just a financial concern, it is a national security imperative, and it should be treated as such.