The Congressional Budget Office this week predicted that the government’s interest payments on the national debt will more than triple over the next ten years if no changes are made to the government’s pattern of overspending.
But CBO said the biggest reason for this increase is not the addition of new debt, but because interest rates on the national debt are expected to rise as the economy improves.
CBO said the government will likely pay $231 billion in interest payments in fiscal year 2014, which ends September 30. But those payments will soar to $799 billion by 2024.
That estimate is actually a reduction from the $876 billion in interest payments CBO anticipated back in April. CBO said much of the drop is do to a new prediction that the interest rates on the debt will not be quite as high as it once believed.
Still, the $799 billion estimate would put U.S. interest payments at 1.3 percent of gross domestic product, which is the highest ratio seen since 1996.
“The rising debt accounts for some of that increase, but much of it stems from CBO’s expectation that — largely owing to the improving economy — the average interest rate paid on that debt will more than double over the next 10 years, from 1.8 percent in 2014 to 3.9 percent in 2024,” CBO said in a Wednesday blog post.
CBO’s estimates are based on the relationship between the size of the national debt and national GDP. But the nominal size of the debt will also grow dramatically over the next 10 years, barring any major changes to current spending.
By the end of fiscal year 2014, the size of the national debt held by the public will be $12.8 trillion, which is 74 percent of GDP.
By 2024, the debt will rise to an estimated $20.5 billion. While that’s a 60 percent increase, the size of the debt relative to GDP will only change slightly, to 77 percent, as the economy is also expected to grow over the next 10 years.
As of Tuesday, the total size of the debt was $17.7 trillion, but that includes about $5 trillion in intergovernmental holdings, which is money the government has borrowed from various government agencies in order to fund current operations.
CBO’s analysis was an in-depth look at the debt that was based on a broader report released earlier this week, which said CBO was slashing its growth expectation by more than half for 2014.