The Congressional Budget Office (CBO) has issued a warning that the US national debt is set to nearly double over the next three decades, and the interest payments on this debt will triple in relation to the country’s gross domestic product (GDP). In its report released on Wednesday, the CBO stated that if current laws remain unchanged, the federal government debt as a percentage of GDP will increase from the current estimate of 98% to 107% by 2029, and a staggering 181% by 2053.
This increase in debt poses various risks and challenges. The CBO highlighted that such high levels of debt would impede economic growth, lead to a significant rise in interest payments to foreign holders of US debt, and pose risks to the fiscal and economic outlook of the country.
The US national debt is primarily made up of debt held by the public, which represents the amount borrowed from both domestic and foreign investors to support government activities and meet essential obligations such as healthcare programs and social security. As of December 2022, the public debt stood at 78% of the gross federal debt.
The current total US debt exceeds $32 trillion, as the government recently suspended the debt ceiling to avoid a default. This suspension allows the government to continue borrowing without legal limits and adds to the already significant debt burden.
Meanwhile, the US Federal Reserve has been implementing a series of interest rate hikes in an attempt to combat the nation’s worst inflation in decades. The Fed interest rate currently stands at 5% to 5.25%, a significant increase from 0% at the beginning of 2022. These rate hikes have implications for the government’s interest payments on its debt.
According to market strategist Charlie Bilello, interest payments by the US government soared to 3.5% of GDP in the first quarter of this year, compared to 2.4% in the same period in 2022. This increase represents the largest annual jump on record, highlighting the growing challenge of managing the debt and its associated costs.
The CBO report also predicts that the gap between government spending and revenues will continue to widen in the coming decades, reaching 10% of GDP by 2053. Rising interest rates and primary deficits are expected to contribute to a nearly threefold increase in interest costs relative to GDP over the next 30 years.
The increasing national debt and the rising interest payments it necessitates will have significant implications for the economy and the country’s future. It will likely hinder economic growth, burden future generations with substantial debt obligations, and intensify the risks associated with relying on foreign investors to finance government operations.
Overall, the CBO’s warning serves as a reminder of the urgent need to address the growing national debt and implement sustainable fiscal policies to safeguard the country’s economic stability and long-term prosperity.