The Cost of Financing the Debt

Discover who finances the debt and how the Treasury manages the debt.

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Higher Debt but With Lower Financing Cost – For Now

While the federal debt has grown considerably over the last decade, the cost to finance it has actually fallen from a high of 14.8 percent of the federal budget in 1989 to just 6.0 percent today. In fact, even in non-inflation adjusted dollars, the net interest expense now is lower than back in 1997 when the government ran a surplus and had considerably less debt.

Low interest rates have afforded the country significant fiscal flexibility despite the increase in total debt. However, the Congressional Budget Office (CBO) expects interest rates to rise over the next several years. Current CBO baseline projections show the debt service burden doubling to above 13 percent of the federal budget by 2026. Under this scenario, interest expense costs would remain manageable, but the trend would be concerning because it would be untenable over the long-term and could have serious economic implications.

U.S. Net Interest As Percent of the Federal Budget

Dealing With the Debt Ceiling

The Treasury can issue debt only if Congress and the president have given it authority to do so; this authority has become synonymous with the debt ceiling. Failure to raise the debt ceiling when necessary could result in the U.S. government defaulting on its obligations, which it has never done.

The debt ceiling restricts the Treasury’s ability to borrow but does not hinder Congress’s ability to enact spending legislation. Once the debt ceiling is reached, the Treasury is faced with not paying bills legislators have already authorized. Raising the debt ceiling does not directly alter federal spending going forward.

Legislative uncertainty over raising the debt ceiling has at times forced the Treasury to take extraordinary measures, brought about market uncertainty, rating agency downgrades, and intense political wrangling. A bipartisan bill that passed Congress in late 2015 waived the debt ceiling until March 2017. The timing allowed this issue, which has plagued legislators, to be a non-issue until after the 2016 general election. Lifting the debt ceiling did not lead to a flood of new debt issuance—debt is issued only when the Treasury needs funds to cover spending Congress has already authorized.

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