As U.S. Debt Grows, Interest Costs Hit 1968 Low

By Jonathan Nicholson

Aug. 27 — While U.S. debt is much larger now, interests costs on that debt by one metric are at their lowest point since the late 1960s, the nonpartisan Congressional Budget Office said recently.

In its budget update issued Aug. 25, the nonpartisan CBO projected the government's 2015 net interests costs will be equivalent to 1.2 percent of the size of the economy, as measured by Gross Domestic Product. That would be down from 1.3 percent in 2013 and 2014 and the lowest as a percentage of GDP since 1968, according to CBO historical figures.

That is still a pretty hefty amount of cash, in nominal terms. The CBO projects net interest spending of $218 billion in 2015, which would be only about $27 billion less than the government spent on the 2014 Department of Defense's operations and maintenance budget. It was, though, the lowest nominal interest spending since 2010.

The CBO said the projected fall in interest payments from $229 billion in 2014 was due to low inflation, which means the government had to pay out less for its inflation-protected debt securities, which guarantee investors a rate of return over inflation.

“The effect of the continued accumulation of debt, however, will offset some of that decrease. Because interest rates remain very low by historical standards, total outlays for net interest are similar to amounts recorded 15 to 20 years ago, when federal debt was much smaller,” the CBO said.

Large Increase Still Expected

In 2000, for example, the debt held by the public totaled about $3.410 trillion, according to Office of Management and Budget data. But because interest rates were higher, the amount of interest outlays on that debt totaled $222.9 billion. For 2015, the amount of publicly-held debt is projected by the OMB to be about $13.506 trillion, or nearly four times as much as in 2000.

Even when measured as a percentage of GDP, the results are similar. In 1968, net interest costs were 1.2 percent of GDP, while public debt totaled 32.2 percent of GDP. In 2015, public debt in proportion to the economy is expected to be 73.8 percent, according to the CBO.

CBO Director Keith Hall cautioned against assuming low interests costs will continue, however. At his briefing with reporters Aug. 25, Hall said the agency decided to revise 10-year interest costs down by $324 billion after looking at financial markets.

“They clearly were beginning to expect a little lower growth in interest rates than we had forecast, so we made an adjustment for that,” he said.

“Almost certainly, under current law, we'll have a very large increase in interest payments as these interest rates go up,” Hall said. “You can adjust it a little bit, but it's still going to be a very large increase in the cost of interest on the debt.”

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