NEW YORK – Interest payments on the federal debt will more than triple over the next decade, according to the Congressional Budget Office projected in a report released Wednesday.
Federal baseline studies project the total federal debt, estimated at approximately $17.7 trillion, will climb to $20.6 trillion in 2024, with interest payments on the federal debt climbing from $231 billion in 2014 to $799 billion in 2024.
The tripling of interest payments on the federal debt and the growth of the accumulated debt closer to 100 percent of GDP over the next 10 years are factors economists typically anticipate will put a drag on economic growth rates.
The CBO projected the average interest rate paid on the debt will double over the next 10 years, from 1.8 percent in 2014 to 3.9 percent in 2024, largely owing to expectations the economy will improve over that period of time.
The 10-year Treasury rate began rising from very low levels in 2012 and is currently close to 2.4 percent, still low by historical standards, the report noted.
The CBO anticipates the 10-year Treasury rate will be pushed up over time by market participants’ expectations of an improving economy, the rise in short-term interest rates and an end to the Federal Reserve’s purchases of long-term Treasury securities and mortgage-backed securities.
This year, the Federal Reserve under current Chairwoman Janet Yellen has implemented a plan to “taper” Quantitative Easing to zero by the end of the year. The move will terminate a policy under which the Federal Reserve under previous chairman Ben Bernanke was purchasing in the range of $85 billion a month in U.S. Treasuries to keep interest rates low.
The CBO further projected the estimated $20.6 trillion total federal debt in 2024 would constitute at that time 77 percent of gross domestic product, or GDP.
The report released Wednesday is the “bad news” to accompany the CBO’s update to the budget and economic outlook over the next 10 years, released Aug 27. It offered the relatively good news that the federal budget deficit for fiscal year 2014 will amount to $506 billion, some $170 billion lower than the shortfall recorded in 2013.
The reports contained warnings that federal discretionary spending, the portion of the federal budget largely attributable to social welfare programs, continues to rise, with no end in sight.
See the current status of the U.S. debt:
The CBO noted total federal spending is expected to rise by about 2 percent this year, to $3.5 trillion. Meanwhile, outlays for mandatory programs, governed by statutory criteria and not normally controlled by the annual appropriation process, are projected to rise by about 4 percent.
The CBO commented that the increase in federal non-discretionary spending reflects growth in some of the largest programs, including a 15 percent increase in spending for Medicaid and a roughly 5 percent increase in spending for Social Security.
In contrast, the CBO estimated, net spending for Medicare will increase by only 2 percent in 2014, and spending for some mandatory programs will fall. In particular, outlays for unemployment compensation are expected to drop by nearly 40 percent, primarily because the authority to pay emergency benefits expired at the end of December 2013.