Interest on national debt: 'Skyrocketing' costs ahead

national-debt-interest-rates By Jeanne Sahadi, senior writer


NEW YORK (CNNMoney) -- Interest payments on the national debt could total $5.5 trillion over the next decade, or about 79% of the new debt estimated to accrue between 2012 and 2021.

And that's the optimistic scenario.

"Interest payments on the debt are poised to skyrocket over the next decade," the nonpartisan Congressional Budget Office wrote in its most recent budget outlook report.

The CBO -- and everyone else for that matter -- assumes that interest rates will rise. Just how quickly is the question. The CBO assumes a gradual rise, and projects that the 10-year Treasury rate won't hit 5% before 2015, up from an average of 3.2% today.

But if interest rates end up being 1 percentage point higher than the CBO assumes over each of the next 10 years, interest costs could go up by another $1.3 trillion, putting total costs at $6.8 trillion.

What could push rates up sooner than the CBO anticipates? Among the possibilities:

-- The lack of a medium- or long-term debt reduction plan by 2013, said Jim Vogel, head of interest rate strategies at FTN Financial.

-- Greater-than-expected inflation, three leading economists told the Senate Budget Committee on Tuesday.

Of course, it's not just rising rates that could push up interest costs -- it's also the accumulation of more debt than expected.

For example, the future extension of some pricey policies on the books today, such as the Bush (now Obama) tax cuts or measures protecting taxpayers from having to pay the Alternative Minimum Tax. Such policy extensions on top of faster-than-expected rate increases could bump up interest costs to $7.5 trillion.

Here's what it means if interest costs range between $5.5 trillion and $7.5 trillion: Between 14 cents and 19 cents of every federal tax dollar collected over the next decade would be eaten up by interest.

That's 14 cents to 19 cents of every tax dollar that will not be available to pay for government services and programs, or to aid Americans and states in the event of an economic downturn or natural disaster.

Looked at another way, the cost of interest payments in 2021 alone would trump what the government is expected to spend on defense, Medicare or all of the non-defense discretionary programs.

Consider, too, some of the debt-reduction proposals that have been put forth so far by those in Congress and by the White House, the Concord Coalition notes in its analysis of CBO's estimates.

"The president has proposed $478 billion in discretionary spending cuts and the Republican Study Committee has proposed $2.5 trillion in savings, but neither proposal would come close to even paying the interest on the debt." To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 16,912.11 -70.48 -0.42%
Nasdaq 4,442.70 -2.21 -0.05%
S&P 500 1,969.95 -8.96 -0.45%
Treasuries 2.46 -0.03 -1.16%
Data as of 9:08pm ET
Company Price Change % Change
Frontier Communicati... 6.79 0.85 14.31%
Windstream Holdings ... 11.83 1.30 12.35%
AT&T Inc 36.59 0.94 2.64%
CenturyLink Inc 39.90 2.19 5.81%
Bank of America Corp... 15.34 -0.16 -1.03%
Data as of 4:03pm ET

Sections

McDonald's may be liable for worker lawsuits, not just franchisees, in a government ruling that could change the fast-food business. More

Amgen is the latest to continue corporate America's cost cutting strategy, even as the economy is supposedly on the mend More

Bunch o Balloons allows multiple water balloons to be filled at once. Parents are loving it -- to the tune of $645,000. More

Steve Mason, a pastor from California, inherited more than $100,000 in student loan debt when his 27-year-old daughter died suddenly in 2009. With interest and late penalties, the debt has since ballooned to $200,000. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.