In 2012, the U.S. will spend around $220 billion in net interest on its debt, according to the Congressional Budget Office — a figure that is expected to spiral ever higher in coming years.
Erskine Bowles, a co-chair of the president’s bipartisan deficit-reduction commission known as “Simpson-Bowles,” has called the nation’s compound interest burden one of the biggest long-term challenges facing the United States.
“We’ll be spending over $1 trillion a year on interest by 2020. That’s $1 trillion we can’t spend to educate our kids or to replace our badly worn-out infrastructure,” said Bowles at a recent forum hosted by IHS Global Insight. “What makes it doubly bad is that trillion will be spent principally in Asia, because that’s where our debt is.”
Given that most Americans’ financial dealings tend to be on a much smaller scale, those multi-billion-dollar totals can be enough to make a layperson’s eyes glaze over. Here is a comparison of how the nation’s interest spending compares to spending in other areas.
Sources: 2011 actual spending totals from President’s FY 2013 budget, Congressional Budget Office, USDA. All figures are for 2011 except Medicare, Medicaid, and interest spending, which are estimates for 2012.
What does it all mean? How daunting that $220 billion figure is depends on how you frame it. Compared to other government spending, it might seem like an exorbitant price to pay—at more than double annual federal outlays for education. Compared to interest spending, federal outlays on food stamps and the Corporation for Public Broadcasting are also dwarfed. And it’s one-third the size of the Defense Department’s massive annual spending.
But viewed another way, it can seem much smaller, at around 6 percent of the total federal budget and 1.4 percent of GDP. Low interest rates are one key factor helping to keep the government’s interest burden low. Dean Baker, codirector of the Center for Economic and Policy Research, a Washington, D.C.-based economic think tank, pointed out in a blog post earlier this year that interest as a share of GDP is actually relatively low right now and is not projected to leap to unprecedented heights anytime soon.
“Interest rates have fallen through the floor,” says Baker. “What that means is at the moment our interest burden is pretty low.”
But low interest rates will eventually disappear as the economy recovers. And if investors should decide that U.S. debt is a risky investment, that would also drive interest rates up, making U.S. debt increasingly difficult to manage. Credit rating agency Moody’s earlier this year warned that it might downgrade the rating on U.S. debt if lawmakers do not find a way to avoid the coming fiscal cliff. A downgrade could go a long way toward driving up interest rates.
Whatever spurs growing interest rates, the prospect of $1 trillion in annual payments is daunting, says one expert.
“That’s a lot of money to be spending on something that doesn’t do anything for you,” says Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget. Still, he explains that it’s not time to panic just yet.
“We’re not at the point of no return, I think,” Goldwein says. “There are many policy paths that can get us back to sustainability and get our debt under control.
Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter @titonka or via E-mail at firstname.lastname@example.org.