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E.J. Antoni is a public finance economist and the Richard F. Aster fellow at the Heritage Foundation, and a senior fellow at Unleash Prosperity.
If you don’t think the interest on the federal debt is a problem, try this quick exercise. Grab your pay stub for June and see how much you paid in federal income tax, then realize that more than 75 percent of that was effectively your contribution to interest on the debt last month. No roads, schools, military or hospitals — just interest. Houston, we have a problem.
For the first time ever, the government spent $140 billion in a single month to service its gargantuan debt of nearly $35 trillion. By the end of this fiscal year, the Treasury will spend almost $1.2 trillion in interest alone. And the problem is getting worse.
For June, not a single line item in the Treasury’s monthly statement was larger than the $140 billion interest expense. It was larger than either the Social Security Administration ($129 billion), Department of Health and Human Services ($90 billion), Department of Education ($87 billion) or Department of Defense ($63 billion).
Interest is now equal to more than three-quarters of all personal income taxes, and more than 30 percent of all taxes and duties received by the Treasury in June. Not only is the nation drowning in debt, but now the interest payments are an anchor around its neck.
Federal finance can seem a bit ephemeral, so let’s put this in terms of family finances. Imagine a family has racked up more credit-card debt than it earns in an entire year. Those cards had low introductory interest rates, so even as their debt ballooned, the monthly interest payments seemed manageable. But then, rates rose — and so did the finance charges.
Because the family spends more than they earn each month (hence the massive credit card debt), any additional expenses only exacerbate their financial nightmare. Higher interest is just another expense that must be financed, which means their outstanding balances will now grow that much faster.
Of course, higher balances mean higher finance charges, and the debt doom loop has begun. The family has no way out other than severe spending cuts in their budget or an ignominious bankruptcy.
This is where our federal government is today. It has spent so much more than it has taken in that it has racked up a $35 trillion debt. It’s not only many times larger than annual federal tax revenue, but more than 20 percent larger than the nation’s entire economy.
One key difference, however, between the family budget and the federal budget is “counterfeiting.” For the family, this isn’t an option — unless they want to go to jail. For the federal government, creating money is the preferred way to conduct a backdoor default on its obligations.
Through the Federal Reserve, the government has been expanding the money supply and devaluing the dollar, including the nearly $35 trillion that make up the federal debt. This allows the government to repay that debt, and pay the interest, using depreciated currency.
If you loaned the government $1 at the start of 2021 and got it back today, it’d only be worth about 80 cents. Even if you received 5 percent interest each year, you’d still be getting less back from the Treasury than you originally lent out.
This is why the stratospheric rise in the interest on the debt should concern everyone. Not only is it displacing funding for things like roads and the military, but it will also mean much more inflation unless we take a chainsaw to federal spending, à la Argentinian President Javier Milei.
That course correction had better come quick. The federal government is already running $2 trillion annual deficits, driving up interest on the debt exponentially. The time bomb of federal finance has already started ticking down.
