According to Moody’s Analytics, interest payments for the national debt are expected to exceed defense spending over the next five years.
According to a Treasury Dept. report, the federal government has spent $475 billion on net interest to service the country’s debt during the previous fiscal year, surpassing the $425 billion in revenues received from corporate taxes and the total value of both veterans’ transportation and benefits. As interest rates and borrowing continue to rise, Moody’s Analytics predicts that interest payments will exceed defense expenditure, which totaled $767 billion in 2021, by 2025 or 2026.
Indeed, the federal government was able to borrow money at a low interest rate because of the low interest rate environment. However, since the Federal Reserve has begun raising the target federal funds rate in a bid to combat increasing inflationary pressures, interest rates throughout the economy have risen drastically.
The federal government’s national debt reached $31 trillion last month, following years of growing deficit spending under both Democratic and Republican administrations. According to data from the Office of Management and Budget, while Pres. Barack Obama ran budget deficits as big as $1.4 trillion during his first term, Pres. Trump ran a deficit of almost $1 trillion in 2019, one year before the deficit more than tripling to $3.1 trillion as a consequence of lockdown stimulus spending. President Biden has subsequently maintained that his administration’s nominal decrease in the deficit to $1.4 trillion, which still surpasses all but one pre-lockdown deficit, is a tremendous success.
Net interest expenditures have varied between 1.2% and 3.2% of GDP during the last half-century, but growing debt and interest rates could push costs to 3.3% of GDP by 2032 and 7.2% of GDP by 2052, according to a Congressional Budget Office estimate. Rising interest rates, according to the government, will account for half of the forecast increase in net interest outlays.
“Excessive government debt causes two undesirable consequences,” Bahnsen continued. “First, corporations and capital allocators see the need to service the debt in the future and take income from the private sector, and as a result, they spend less in productive activities. Second, the real allocation of capital indicates a reduction in productive usage, from the profit incentive to the inefficiencies of government use. Muted growth is now the best-case scenario, and recession is a serious possibility.”
Bahnsen went on to say that “the real disaster” happens when fiscal and monetary officials try to revive the economy in reaction to decreasing production. “More government expenditure or more monetary accommodation start to become morphine to the sufferer,” he stated, “producing an ever-diminishing return and intensifying a spiraling negative feedback loop that affects productivity and growth.”