Interest Payments on the Federal Debt: A Primer

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

Of the three broad categories of federal spending, the only category that cannot be reduced by
legislative action is net interest payments. Net interest payments accounted for about 7% of
federal spending between 1962 and the late 1970s. With the high interest rates in the late 1970s
and the large budget deficits in the 1980s, net interest payments eventually rose to 15% of federal
spending. The low interest rates combined with budget discipline in the 1990s reduced net
interest payments back down to 7% of federal outlays by 2003. However, net interest payments
have recently increased and are projected to continue increasing in the near-term. This report will
be updated annually.

Federal Debt....................................................................................................................................1
Interest Payments on the Federal Debt............................................................................................2
Determinants of Net Interest Payments...........................................................................................4
Figure 1. Total U.S. Federal Debt and Debt Held by the Public, FY1962-FY2019........................2
Figure 2. Gross and Net Interest on Treasury Debt Securities, FY1962-FY2019...........................3
Figure 3. Interest Rate, Net Interest Payments, and Debt Held by the Public, FY1967-
FY2008 ......................................................................................................................................... 5
Author Contact Information............................................................................................................6

ederal spending is divided into three broad categories. First, discretionary spending is
provided and controlled by the annual appropriations acts and includes such things as ¹
defense and education spending. Discretionary spending currently accounts for about 40% F

of federal outlays. Second, direct or mandatory spending is provided and controlled by laws other
than appropriation acts and includes spending for such programs as Social Security and ²
Medicare. Mandatory spending accounts for over half of federal outlays. Lastly, net interest
payments are interest payments on federal debt held by the public and currently account for
almost 9% of federal outlays.
In an effort to reduce spending, the FY2006 budget resolution (H.Con.Res. 95) included
reconciliation instructions to reduce mandatory spending by $35 billion over the next five years.
Congress ultimately voted to reduce mandatory spending by about $40 billion over five years. In
addition, Congress enacted a 1% across-the-board reduction in FY2006 discretionary spending.
The only category of federal spending that cannot be reduced by legislative action (barring
default on the public debt) is net interest payments.
While Congress cannot affect current net interest payments, congressional actions on the budget
will affect future interest payments. This report examines net interest payments and the
mechanisms through which Congress can affect net interest payments.

Federal debt is composed of debt issued by the Treasury (Treasury securities) and debt securities
issued by other federal agencies (agency securities). At the end of FY2008, total federal securities
amounted to $10.0 trillion, of which only $23.1 billion (less than 0.3%) were agency securities.
Federal debt is held either by the public (that is, private investors) or in government accounts.
Currently, about 42% of federal debt is held in various government accounts. For example, the
two Social Security trust funds currently hold about $2.4 trillion in Treasury securities. The rest
of the federal debt is held by the public (foreign and domestic), including individuals, pension
funds, banks, and other investors.
Figure 1 shows the level of total federal debt and debt held by the public since 1962 as a
percentage of gross domestic product (GDP). Both measures of debt fell as a proportion of GDP
between 1962 and the mid-1970s. Beginning in 1981, total federal debt began to climb as tax
cuts, increases in defense spending, and a recession increased budget deficits. Total debt
continued growing relative to GDP until the mid-1990s. As budget deficits gave way to budget
surpluses after 1997, and as the economy expanded, federal debt fell as a percentage of GDP. The
mild recession and the tax cuts in 2001 moved the federal budget back into deficit and federal
debt consequently increased.
Between 1962 and 1982, total federal debt and debt held by the public followed roughly parallel
trends. After the mid-1980s, however, trends in total federal debt and debt held by the public
began to diverge. This was mainly due to changes in the Social Security program enacted in 1983

¹^For^m^o^r^e^inf^o^r^m^a^{tion o}ⁿ^dis^c^r^e^ti^ona^r^y^s^p^e^nding^s^e^e^C^R^S^R^e^p^o^r^t^R^L³⁴⁴²^4,^Tr^eⁿ^dsⁱⁿ^Dⁱ^s^c^r^e^tion^a^r^y^Speⁿ^dⁱⁿ^g^{, by}^D^.
^A^ndr^ew^A^u^s^{tin a}ⁿ^{d Mi}^ndy^R^.^L^e^v^it.
²^For^m^o^r^e^inf^o^r^m^a^{tion o}ⁿ^m^a^nda^tor^y^s^p^e^nding^s^e^e^C^R^S^R^e^por^t^R^L³³⁰⁷⁴^,^M^aⁿ^d^a^t^or^y^S^p^eⁿ^din^g^Sinc^e¹⁹⁶²^{, by}^D^.
^A^ndr^ew^A^u^s^{tin a}ⁿ^{d Mi}^ndy^R^.^L^e^v^it.

which increased revenues and reduced the growth in benefit payments. As a result, the Social
Security program began to run surpluses (surplus monies are invested in Treasury securities),
increasing the share of federal debt held in government accounts. The Congressional Budget
Office’s (CBO) baseline projection indicates that total federal debt and debt held by the public ³
will continue to diverge over the next 10 years.
Figure 1. Total U.S. Federal Debt and Debt Held by the Public, FY1962-FY2019
^{(as a per}^{centage of}^GD^P)
⁹⁰
⁸⁰
⁷⁰
⁶⁰
Total Federal Debt
⁵⁰t
rcen
⁴⁰Pe
³⁰
²⁰
Publicly Held Debt
¹⁰
⁰
¹⁹⁶²¹⁹⁶⁶¹⁹⁷⁰¹⁹⁷⁴¹⁹⁷⁸¹⁹⁸²¹⁹⁸⁶¹⁹⁹⁰¹⁹⁹⁴¹⁹⁹⁸²⁰⁰²²⁰⁰⁶²⁰¹⁰²⁰¹⁴²⁰¹⁸
Year
^Source:^{OMB a}^{nd CBO.}

In FY2008, total or gross interest on Treasury debt securities amounted to about $460 billion—
about 15% of federal outlays. However, not all of this flowed from the Treasury to the public—
about $210 billion was credited to government accounts such as the Social Security trust funds.
The interest payments on the Treasury securities held in government accounts do not represent

³^{CBO’s b}^a^selⁱⁿ^{e p}^r^o^j^ectⁱ^oⁿ^st^art^s^wⁱ^t^h^Coⁿ^g^ress’s^m^o^st^recen^t^b^u^d^g^et^ar^y^d^eci^si^oⁿ^s^an^d^t^h^{en assu}^m^e^s^t^h^at^no^p^o^lⁱ^c^y
^c^h^aⁿ^g^e^{s w}^{ill be}^m^a^de^ov^e^r^the^pr^oje^c^tion^pe^ri^od.^For^eⁿ^title^m^e^{nt p}^r^og^ra^m^s^{CBO a}^ssu^m^e^{s tha}^t^c^u^rre^{nt la}^w^s^w^ill
^c^onti^nue^uⁿ^c^h^aⁿ^g^e^{d a}^nd^by^la^w^a^ssum^e^{s tha}^t^disc^re^tio^na^ry^sp^e^ndin^g^w^{ill g}^r^o^w^a^t^the^ra^te^of^inf^l^a^tion^thro^ug^ho^{ut t}^h^e
^proje^c^tioⁿ^pe^rio^d^{. F}^o^{r re}^v^e^nue^s,^{CBO a}^ssum^e^{s tha}^t^the^pr^ov^isions^{in t}^h^e²⁰⁰¹^aⁿ^d²⁰⁰³^ta^x^c^u^{ts w}^{ill e}^x^pire^on
^sc^he^dule^,^aⁿ^{d t}^h^a^t^m^o^re^indivⁱ^d^u^a^l^{s w}^{ill be}^subje^c^t^t^o^t^h^e^a^lte^rna^tiv^e^mⁱⁿⁱ^m^u^m^ta^x⁽^A^M^T^{). Furthe}^rm^ore^,^the^ba^se^line
^pr^oje^c^tioⁿ^doe^sⁿ^o^{t i}ⁿ^c^l^u^d^e^the^bu^dg^e^t^a^r^y^ef^f^e^c^t^s^of^aⁿ^y^new^s^tim^ul^us^le^gⁱ^s^l^a^tion.^C^B^O^’^s^ba^s^e^line^is^not^inteⁿ^d^e^d^to^be
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^B^u^dg^et^an^{d E}^c^oⁿ^o^mⁱ^c^Ou^tl^oo^k:^Fi^sca^l^Y^e^a^{rs 20}⁰⁹^to²⁰¹⁹^,^J^a^nua^r^y²⁰^09.

funds or real resources available for spending. Rather these interest payments are merely a ⁴
bookkeeping entry transferring funds from one government account to another.
The upper line in Figure 2 shows the evolution of gross interest payments since 1962. Gross
interest payments remained at about 7% to 8% of outlays until the late 1970s. After 1978, interest
payments rapidly increased to reach almost 18% of outlays by 1997. After 1997, gross interest
payments fell as a percentage of outlays as interest rates fell and the federal budget moved from
deficit to surplus. When federal budget deficits reappeared in 2002, gross interest payments began
rising.
Figure 2. Gross and Net Interest on Treasury Debt Securities, FY1962-FY2019
^{(as a per}^{centage of feder}^{al ou}^tlays)
²⁰
¹⁸
Gross Interest Payments
¹⁶
¹⁴
¹²t
¹⁰rcen
⁸Pe
Net Interest Payments
⁶
⁴
²
⁰
¹⁹⁶²¹⁹⁶⁷¹⁹⁷²¹⁹⁷⁷¹⁹⁸²¹⁹⁸⁷¹⁹⁹²¹⁹⁹⁷²⁰⁰²²⁰⁰⁷²⁰¹²²⁰¹⁷
Year
^Source:^{OMB a}^{nd CBO.}
Net interest payments are the component of gross interest payments that involves a transfer of
funds or real resources from the government to the public. The lower line in Figure 2 shows the
evolution of net interest payments since 1962. For the most part, net interest payments followed
the same basic trend as gross interest payments. However, the gap between gross and net interest ⁵
payments widened after the mid-1980s. As with gross interest payments, net interest payments

⁴^{In e}^sse^nc^e^,^theⁱⁿ^te^re^{st pa}^y^m^eⁿ^ts^a^r^e^use^d^to^purc^h^a^s^e^m^o^re^T^r^e^a^s^u^r^y^s^e^c^u^ritie^{s. W}^h^ile^{not re}^pre^s^eⁿ^ti^ng^re^a^l^re^sourc^e^s
^a^v^a^ila^ble^f^o^{r c}^u^rre^{nt spe}^ndi^ng^{, t}^h^e^g^o^v^e^rn^m^e^{nt w}^{ill e}^v^eⁿ^tua^lly^ha^ve^{to f}ⁱ^{nd re}^a^l^re^so^urc^e^s^(by^ra^ising^ta^x^e^{s or re}^duc^ing
^spe^ndi^ng^{) f}^o^{r the}^re^de^m^p^tion^of^the^s^e^se^c^u^ritie^{s, un}^de^{r c}^u^rre^nt^la^w^.
⁵^T^h^e^wⁱ^de^ning^of^this^g^a^{p is}^d^u^e^,ⁱⁿ^pa^r^t^,^to^theⁱⁿ^c^r^e^a^s^e^s^{in the}^S^o^cⁱ^a^l^Se^c^u^r^ity^tr^us^{t f}^{und r}^e^s^u^lt^ing^f^r^om^the¹⁹⁸³
^a^m^en^d^m^en^t^s^t^o^t^h^{e S}^o^ci^al^S^ecu^ri^t^y^Act^.^T^h^{ese a}^m^en^d^m^en^t^s^l^e^d^t^oⁱⁿ^creasiⁿ^{g reven}^u^e^{s t}^o^t^h^{e S}^o^ci^al^S^ecu^ri^t^y^p^r^o^g^ra^m^,
^a^{nd r}^e^d^u^c^e^d^the^g^r^ow^{th i}ⁿ^be^ne^f^its^.

fell as a percentage of federal outlays when federal debt declined in the late-1990s. Net interest
payments began to increase in 2004 but leveled out because of falling interest rates. Additionally,
net interest payments are projected to fall dramatically in 2009 due to very low interest rates.
Large budget deficits in 2009 and 2010, however, will lead to rising net interest payments for the ⁶
next five to six years. CBO projects that, under plausible scenarios, net interest payments could ⁷
continue rising indefinitely.

The primary determinants of net interest payments are (1) the interest rate or yield on U.S.
Treasury securities, and (2) the level of debt held by the public. Figure 3 shows the evolution of
net interest payments, debt held by the public, and the interest rate since 1967. The interest rate is
the yield on five-year constant maturity U.S. Treasury bonds. Both net interest payments and debt
held by the public are expressed as a percentage of GDP, and are indexed so that the value in ⁸

1967 is equal to one.

Net interest payments increased rapidly beginning in 1977 at about the same time that interest
rates increased dramatically (see Figure 3). Net interest payments continued to increase after
interest rates fell in the early 1980s because of the increase in debt held by the public. The
increase in debt held by the public was due to the large budget deficits in the first years of the
Reagan Administration and counteracted the effect of falling interest rates on net interest
payments. As both interest rates and debt held by the public fell after 1997, net interest payments
fell as a proportion of federal outlays.
The government can, to some extent, control the effective interest rate paid on its debt by varying
the maturity of its securities. The federal government issues both short-term and long-term debt.
The yield on Treasury securities varies with the maturity of the securities. Typically, short-term
securities have a lower yield than longer-term securities, and the yield curve, therefore, is upward ⁹
sloping. Occasionally, the yield curve will invert with longer-term securities having a lower yield
than short-term securities, but this happens neither often nor for extended periods.

⁶^{CBO proje}^c^t^{s t}^h^a^t^t^h^e^de^fⁱ^c^{it w}^ill^be^a^l^m^o^{st $1,}²⁰^{0 b}^illi^{on i}ⁿ²⁰⁰⁹^a^{nd $}⁷⁰³^billi^onⁱⁿ²⁰¹⁰^{. Se}^e^CB^O,^Bu^dge^{t an}^d
^Ec^onom^ic^O^u^tlo^ok^{, J}^aⁿ^u^a^r^y^2009.
⁷^S^{ee CBO,}^The^L^oⁿ^g^-^t^e^r^m^Bu^dge^t^O^u^tlo^ok^,^Decem^b^e^r^2005.
⁸^T^h^{e i}ⁿ^d^e^{x i}^s^creat^ed^b^y^dⁱ^vi^dⁱⁿ^g^t^h^{e val}^u^{e i}ⁿ^each^y^{ear b}^y^t^h^{e val}^u^{e i}ⁿ¹⁹⁶⁷^.^T^hⁱ^sⁱ^s^d^oⁿ^e^so^t^h^at^b^o^t^h^seri^{es f}ⁱ^t^oⁿ^t^h^e
^s^a^m^e^g^r^a^ph.
⁹^T^h^e^yⁱ^e^l^{d c}^u^rv^e^{is the}^re^la^tio^nshi^{p of}^the^yⁱ^e^l^{d on}^se^c^u^ritie^{s a}ⁿ^d^th^e^m^a^turity^of^those^se^c^u^ritie^s.

Figure 3. Interest Rate, Net Interest Payments, and Debt Held by the Public,
FY1967-FY2008
³¹⁵
Net Interest
⁽^l^e^{ft a}^xⁱ^s⁾Interest Rate
^2.⁵^(r^ight^a^x^is⁾
²¹⁰
=1)P
ercen
^1.⁵ (1967
t
dex
¹In⁵
Debt Held by the
^0.⁵Public⁽^l^e^{ft a}^xⁱ^s⁾
⁰⁰
¹⁹⁶⁷¹⁹⁷¹¹⁹⁷⁵¹⁹⁷⁹¹⁹⁸³¹⁹⁸⁷¹⁹⁹¹¹⁹⁹⁵¹⁹⁹⁹²⁰⁰³²⁰⁰⁷
Year
^Source:^{OMB a}^{nd Federal Reser}^{ve Board.}
A primary goal of debt management is to obtain the lowest borrowing cost over time.¹⁰ Over the
past 30 years, the mean maturity of marketable Treasury securities held by private investors has
varied between about three years and six years. Since 2000, the range has narrowed to between
five and six years. However, this apparent stability masks changes in the types of securities ¹¹
issued. In 2001, for example, the Treasury stopped issuing 30-year bonds. Although shorter-
term Treasury securities tend to have lower yields than longer-term securities, they also are more
volatile. Consequently, the financing costs of short-term securities can change dramatically over
fairly short periods. This volatility and uncertainty complicate efforts to obtain the lowest
borrowing costs over time.
Congressional actions affecting the budget deficit will affect federal debt, which, in turn, affects
future net interest payments. Budget deficits and federal debt can also affect the interest rates on ¹²
Treasury securities. Increasing federal debt will increase the supply of Treasury securities. This ¹³
will tend to push down the price and increase the yield of these securities. Recent studies have
estimated that increasing debt held by the public by one percent of GDP will increase future

¹⁰^Se^e^C^R^S^R^e^por^{t R}^L³⁴⁶⁸²^,^Fe^de^r^a^{l D}^e^{bt M}^a^na^ge^m^e^nt:^C^o^nc^e^p^ts^,^O^p^tio^ns^{, a}ⁿ^d^Po^lic^ie^s⁽^1945-²⁰⁰⁸⁾^,^b^y^Ja^m^e^{s M}^.
^Bick^le^y^.
¹¹^T^r^e^a^s^ur^y^be^ga^{n is}^s^u^ing³⁰^-^y^e^a^r^b^onds^a^g^aⁱ^{n in}^Fe^br^ua^r^y²⁰⁰^6.
¹²^T^h^{e st}^ren^g^t^h^o^f^t^h^{e eco}^no^my^,ⁱⁿ^f^l^atⁱ^oⁿ^exp^ect^atⁱ^oⁿ^s^,^and^t^h^{e act}ⁱ^o^{ns o}^f^t^h^{e F}^e^d^e^ral^{Reserve Bo}^ard^al^so^h^a^{ve an}
^im^porta^{nt e}^f^f^e^c^t^{on inte}^re^{st ra}^te^s.
¹³^T^h^{ere i}^s^anⁱⁿ^{verse rel}^a^tⁱ^oⁿ^s^hⁱ^p^bet^w^een^t^h^{e p}^rⁱ^{ce o}^f^{a bo}^nd^an^{d t}^h^e^yⁱ^el^d^o^f^t^h^{e bo}^nd^.

interest rates by two to six basis points (0.02 to 0.06 percentage points).¹⁴ Thus budget deficits
increase federal debt and future interest rates, which in turn increase future net interest payments.
^T^h^om^as^L^.^H^u^ng^er^f^o^rd
^Sp^{ecialist i}ⁿ^P^u^b^{lic Fi}ⁿ^aⁿ^ce
^t^h^ung^erf^o^rd@^c^rs^.l^oc.^g^ov^{, 7-}⁶⁴²²

¹⁴^Se^e^Er^ic^Eng^e^{n a}ⁿ^{d R}^.^G^l^e^{nn H}^u^bba^r^d^,^Fe^de^r^a^l^G^o^v^e^r^nm^eⁿ^{t D}^e^bt^s^an^{d I}ⁿ^te^r^e^s^t^R^a^te^s^{, N}^a^tio^na^{l B}^u^r^e^a^u^of^Ec^onom^ic
^Re^se^a^r^c^h^{, W}^o^rk^ing^P^a^pe^{r n}^o^.¹⁰⁶^{81, A}^u^g^u^st²⁰^{04; W}^illia^m^G^.^G^a^l^e^a^nd^P^e^te^{r R.}^Orsz^a^g^{, “}^B^udg^e^t^De^fⁱ^c^{its, Na}^tiona^l
^Sa^vⁱ^ng^{, a}^{nd I}ⁿ^te^r^e^s^t^R^a^te^s^,^”^Br^oo^kⁱ^ngs^P^ape^r^s^oⁿ^Ec^o^nom^ic^Ac^tivⁱ^t^y^{, v}^o^{l. 2}⁰⁰⁴^,^no^{. 2}⁽²⁰⁰⁴⁾^,^pp.¹⁰¹^-¹⁸^{7; a}ⁿ^{d T}^hom^a^s
^L^a^u^b^ach^,^Ne^{w Ev}^ideⁿ^c^e^oⁿ^t^h^e^In^te^re^{st Rate}^Effe^c^t^{s of}^Bu^dge^{t De}^fi^c^{its an}^{d De}^bt^,^B^o^a^r^d^of^G^o^v^e^r^nor^s^of^the^Fe^de^r^a^l
^R^e^s^e^r^v^e^S^y^s^t^em^{, Fina}^nc^e^a^{nd Ec}^o^nom^ic^s^Dⁱ^s^c^us^sⁱ^{on pa}^pe^r^no^{. 2}⁰⁰³^-¹^{3, Ma}^y²⁰⁰^3.