The rapid increase in interest rates over the past year could cause some collateral damage to the U.S. government's finances.
That is because as interest rates rise, the federal government's borrowing costs on its $32.48 trillion in debt will also increase.
Interest payments on the national debt are projected to be the fastest-growing part of the federal budget over the next three decades, according to the Committee for a Responsible Federal Budget, a group that advocates for reducing the deficit.
Payments are expected to triple from nearly $475 billion in fiscal year 2022 to a stunning $1.4 trillion in 2032. By 2053, the interest payments are projected to surge to $5.4 trillion.
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As a share of the economy, total interest on the national debt will hit a record 3.2% of GDP, which is the broadest measure of goods and services produced in the country, by 2030. That percentage will more than double to 6.7% by 2053.
"By 2051, spending on interest will be the single largest line item in the federal budget, surpassing Social Security, Medicare, Medicaid, and all other mandatory and discretionary spending programs," the CRFB said in the analysis published this month.
For years, the U.S. has been able to borrow cheaply as interest rates have remained historically low. However, as the federal funds rate increases, so will short-term rates on Treasury securities, making federal borrowing more expensive.
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The Federal Reserve has hiked interest rates 10 straight times over the course of 15 months, lifting rates to the highest level since the 2008 financial crisis. Policymakers have signaled that additional rate increases are coming this year amid signs of underlying inflationary pressure within the economy.
The CRFB projections show that interest payments could eventually take up almost 35% of all federal revenue by the end of the next three decades. The group called on Congress to work on reducing the national debt in order to better address fiscal challenges that may emerge in coming years.
"High and rising national debt will mean that more of the budget will go towards servicing that debt with interest payments instead of going towards other priorities," the group said in the analysis. "Importantly, a high interest burden also makes it more difficult for lawmakers to borrow more in times of emergency or during a war without significant consequences."
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The national debt hit $32 trillion in June after a burst of spending by President Biden and Democrat lawmakers. Biden signed into law a health care and climate change spending bill – dubbed the Inflation Reduction Act – in August 2022 that would spend an estimated $739 billion over the next decade.
Most of that revenue stems from new revenue generated by higher taxes; about half is slated to go toward paying down the debt.
