US govt’s interest payments on debt breaches ‘unsustainable levels’ crossing federal spending

Washington: US debt interest payments are taking a “unsustainable” trajectory that will eclipse defence funding in four years and immediately cross overall federal spending making debt servicing its single largest spend eclipsing social security payouts.

Interest payments will be the single largest federal expenditure, topping Social Security by 2051, a projection shows. US debt breached an all-time high of $33 trillion as federal deficit ballooned amid a swath of Treasury bills, budget experts warned.

The US government faced the same dilemma last year too when debt became un-serviceable with republicans wanting to slash Biden’s $1.70 trillion budget to $1.30 trillion but a bi-partisan approach bailed the government out of the mess.

The government finds itself on the same spot this year also. But this is not uncommon in the US government history.

Even under former President Donald Trump, the administration had to encounter such problems.

While a rising debt in itself is not automatically a cause for concern, a more meaningful fiscal measure may be the ability to keep up with debt-service payments.

It is uncommon for nations to completely pay down large balances.

Treasury Secretary Janet Yellen told CNBC on Monday the metric she looks at most often to judge US fiscal health is net interest as a share of GDP.

The Interest-GDP ratio is currently estimated at around 1 per cent, but the Congressional Budget Office (CBO) expects interest payments to constitute 6.7 per cent of GDP by 2053.

What that means is that US debt interest payments will become the single biggest federal expenditure by 2051, eclipsing Social Security pay-outs.

“So clearly this is not sustainable,” Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said.

“The way one evaluates that is – if your debt is growing faster than your economy, which ours (US) is, and if your interest payments exceed the economy, income, a variety of things — those are all huge warning signs. All of them are going off right now,” she told the Business Insider.

CBO estimates US debt as a share of GDP will peak to 107 per cent from from about 100 per cent in 2029 thereby setting a new record, topping the 1,946 peak of 106 per cent. And it is on track to hit 181 per cent by 2053, media reports said.

The US still comforts itself as it boasts of having the largest liquid bond market in the world as it can sell fresh debt to investors whenever needed.

The hitch here for the US government is that debt service payments must precede anything else when it comes to making budgetary decisions.

Failure to pay would risk US defaulting on debt servicing payments as it almost happened in June, MacGuineas said.

Budget experts warn that at the present level, interest payments are already outpacing federal spending on youth education, and in four years, it will top defence spending.

“It gets a lot of attention from members of Congress when they learn that,” she said, adding that is “pretty serious warning signal”.

–IANS