Here's How Having a Huge National Debt Increases the National Debt

ByJames McKitrick

In July, Federal Reserve Chairman Ben Bernanke sat before the House Committee on Financial Services to testify on the nation’s current economic condition and the status of the Fed's monetary policy. During the questioning, Bernanke made it clear that the easing of interest rates will continue for the foreseeable future. Since the 2008 crash, the Federal Reserve has artificially kept rates at near zero, but these will not be sustained indefinitely. The rates will inevitably rise within the next 10 years, hopefully in conjunction with a growing economy. As a direct result, payments to service the national debt to which these rates are tied will further burden the federal budget. 

It is understood that the federal budget pays for services rendered by the government from investments in transportation and defense to providing health care and income security. While these programs go to sustain the wellbeing of our nation, a portion of the budget is sunk into mandatory payments on our massive debt. Set aside in Function 900, Net Interest, the cost in this function is the gross interest paid on the government’s borrowing minus the interest the government receives from its loans to the public and various trust funds.

Over the past 40 years, net interest outlays as a percentage of GDP have fluctuated from a low of 1.3% to a high of 3.3%. While debt held by the public has ballooned in recent years to highs unseen since the 1950s, artificially low interest rates have in turn kept debt service at a low cost. With interest rates unavoidably rising, this trend will quickly reverse. According to recent numbers from the Congressional Budget Office, net interest outlays will more than double as a share of the GDP in the next 10 years, from 1.4% to 3.2%. Net interest will average 2.5% of GDP compared to the 40-year average of 2.2%.  In nominal dollars, payments are projected to almost quadruple from $220 billion in 2012 to $823 billion in 2023. This is by far the fastest growing federal outlay.

Future interest rates and subsequent debt servicing come with a degree of uncertainty, affected by federal spending, legislative action, and economic downturns, amongst other factors. In fact, between February and May, CBO estimates were decreased by a total of $173 billion, attributable to smaller than expected deficits. But slight changes to these projections have an ability to raise costs quickly. Case in point: 2010 calculations by the CBO estimate that a one-point increase in projected interest rates can result in an additional $1 trillion over ten years. Likewise, a deficit increase of $100 billion in a single year can tack on an additional $40 billion.

Interest rates have anywhere to go but down within the next 10 years, bringing with them significant payments on our debt. To be clear, this is money that — in a time of tightened discretionary spending — can be better put to serving the nation’s welfare. It is easy to conclude that since Congress cannot assume direct control over interest rates, it would be wiser for it to target the national debt. Yes, large payments on the debt already incurred would still need to be made. Nevertheless, minimizing future borrowing would translate into slowing this skyrocketing portion of the budget and returning those resources to where they are needed most: education, infrastructure, health, and national defense.

This article was originally published by The Can Kicks Back, a non-partisan and millennial-driven campaign to defeat the national debt and reclaim our American Dream.