The national debt is expected to grow rapidly over the next few years, and rising interest rates could further worsen the nation's fiscal outlook. The Congressional Budget Office (CBO) released its long-range projections in March, predicting that if current law remains unchanged, the national debt will grow from 99% of gross domestic product (GDP) in 2024 to 166% in 2054. Rising interest rates are a major factor in this debt increase.
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Interest rates on U.S. Treasury bills have a significant impact on federal borrowing costs and, therefore, the accumulated amount of federal debt. CBO projects that the average interest rate on U.S. Treasury bills could rise from 3.1% in 2024 to 3.8% in 2054. However, variations from these projections could have a significant impact on the amount of federal debt outstanding. To analyze the impact of interest rates on the federal debt, CBO developed two scenarios:
In the high-interest rate scenario, the average interest rate on the federal debt would be 5 basis points (0.05 percentage points) higher than CBO projected in 2024 and increase by that amount each year thereafter, eventually reaching 5.8 percent in 2054. In the low-interest rate scenario, the average interest rate on the federal debt would be lower by the same amount than CBO's baseline projection in the high-interest rate scenario, eventually reaching 2.2 percent in 2054.
Under CBO’s rising interest rate scenario, the federal debt could reach 217% of GDP in 2054, about 50% higher than CBO’s baseline projection. If interest rates are lower than CBO’s projections, the federal debt would still increase but at a smaller rate, reaching 129% of GDP by 2054.
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The national debt is already on an unsustainable trajectory due to a structural mismatch between expenditures and revenues, and rising interest rates could exacerbate this problem. Even if interest rates declined from current levels and remained low, the debt would exceed record highs and continue to rise. To mitigate the risk of economic damage from rising interest rates, policymakers should work together to put the nation on a sustainable fiscal path.
Related: Deficits projected to total $1.5 trillion in 2023. Why could it be even higher?
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