Interest is the part of deficit spending that keeps working after the spending stops. When the federal government runs a deficit, the Treasury borrows to cover it, and every dollar borrowed carries a promise to pay interest for years or decades afterward. Those interest payments are themselves part of federal spending, so when revenue can’t cover them, the Treasury borrows again. That is the role interest plays in deficit spending: it converts a one-year shortfall into a permanent, compounding obligation, and it now consumes roughly $970 billion a year, about 19 cents of every tax dollar collected.
From Annual Deficit to Interest-Bearing Debt
A deficit is the gap between what the government spends in a fiscal year and what it collects in revenue. The Treasury fills that gap by selling securities to investors, institutions, and foreign governments.1U.S. Treasury Fiscal Data. Understanding the National Debt Each year’s deficit gets added to the running total of past deficits, and that total is the national debt.2U.S. Government Accountability Office. How Could Federal Debt Affect You By late 2025, federal debt exceeded $38 trillion.3Federal Reserve Bank of St. Louis. Federal Debt: Total Public Debt
The portion that matters for interest costs is the debt held by the public, roughly $28 trillion as of late 2024. The remainder is intragovernmental, mostly trust fund balances the government owes to itself.1U.S. Treasury Fiscal Data. Understanding the National Debt Publicly held debt is the piece that goes out into markets and comes back demanding interest payments.
Why Interest Payments Can’t Be Skipped
Interest on federal debt is classified as mandatory spending because it is authorized by a permanent appropriation.4Congress.gov. Trends in Mandatory Spending Congress cannot vote to trim it the way it can trim a discretionary program. The money leaves the Treasury regardless of what the rest of the budget looks like.
A missed payment would be a default. Even a brief, technical default would likely cost Treasury securities their standing as the world’s safest investment, and yields across the curve would rise as investors demanded a risk premium they had not needed before. Every future deficit would then be more expensive to finance. Interest, in other words, is paid first, always, and the government has strong incentives to keep it that way.
The Compounding Loop
When revenue in a given year cannot cover both program spending and the mandatory interest bill, the Treasury borrows the difference.5U.S. Treasury Fiscal Data. Federal Spending That new borrowing adds to the principal. A larger principal produces more interest the next year. More interest widens the deficit, which requires more borrowing, which generates still more interest. The cycle feeds itself.
The clearest way to see it is the difference between the total deficit and the primary deficit. The total deficit is the whole gap between spending and revenue. The primary deficit strips out interest, showing the underlying mismatch between the programs the government funds and the taxes it collects. Over the past 50 years, total deficits have averaged 3.8 percent of GDP while primary deficits averaged 1.7 percent. The two-plus percentage points between those figures is interest.6Peter G. Peterson Foundation. What Is the Primary Deficit Across half a century, interest has roughly doubled the apparent size of the government’s fiscal imbalance.
What Determines the Size of the Interest Bill
Three things drive the annual interest bill, and they interact.
The Size of the Debt
The first driver is the sheer amount owed. As of September 2025, the weighted average interest rate on outstanding marketable debt was 3.406 percent.7Joint Economic Committee. Interest on Debt Projected to Increase Applied to a $28 trillion base, even that modest rate produces the roughly $1 trillion annual cost. If the debt grows and rates stay flat, the bill still climbs.
The Interest Rate Environment
Federal Reserve policy and global demand for Treasury securities together set the rate. When the Fed raises the federal funds rate, short-term Treasury yields tend to follow. Longer-term yields move less predictably and often respond to inflation expectations, growth outlooks, and investor views on federal debt levels.8Federal Reserve Bank of St. Louis. How Might Increases in the Fed Funds Rate Impact Other Interest Rates In late 2024, the Fed was cutting rates while 10-year Treasury yields rose 79 basis points, driven in part by expectations of higher debt levels.9Committee for a Responsible Federal Budget. As the Fed Cuts Rates, Treasury Yields Are Rising If foreign buyers grow less interested in U.S. debt, the Treasury has to offer higher yields to attract them, and those yields feed straight into the interest bill.
The Maturity Mix
The Treasury constantly balances short-term and long-term borrowing. Short-term bills usually carry lower rates but mature quickly, meaning the government has to refinance soon and may face higher rates when it does. Longer bonds lock in a rate for 20 or 30 years but typically cost more upfront. That mix determines how quickly a change in rates flows through to the annual bill.
How Big the Interest Bill Has Become
In fiscal year 2025, interest consumed 3.15 percent of GDP, up from 1.49 percent just four years earlier.10Federal Reserve Bank of St. Louis. Federal Outlays: Interest as Percent of Gross Domestic Product CBO projects 3.3 percent of GDP for FY 2026 and roughly $1 trillion in dollar terms.
The government now spends more on interest than on national defense or Medicare.11Committee for a Responsible Federal Budget. Net Interest Costs Will Double, Again, Over the Next Decade Interest is the fastest-growing major category in the federal budget and is projected to reach roughly $2.1 trillion a year by 2036, essentially doubling across the decade.
What Rising Interest Costs Crowd Out
Because interest is paid first, everything else competes for what remains. As debt service grows, policymakers have less room for infrastructure, research, defense, and social programs. The squeeze is hardest to feel during economic crises, when the government typically needs to spend more, but the baseline interest obligation has already claimed a larger share of available capacity.
Heavy federal borrowing can also raise borrowing costs elsewhere. When the Treasury competes aggressively for capital, other borrowers face higher rates on corporate loans, mortgages, and business financing. Economists call this the crowding-out effect. Research from the Penn Wharton Budget Model estimates that sustained government borrowing at large scale reduces the private capital stock over time, and the drag grows as debt accumulates.
There is a generational piece as well. Current deficit spending delivers benefits to today’s taxpayers, but the interest on the borrowing that funded those benefits extends decades forward. Future taxpayers inherit both the remaining principal and the ongoing interest, dedicating a growing share of their revenue to paying for past consumption instead of their own priorities.
Does Inflation Erode the Debt?
Inflation cuts both ways. Higher nominal GDP makes existing fixed-rate debt look smaller relative to the economy, and a 3 percent bond becomes cheaper in real terms when prices rise 4 percent. But inflation also pushes up the rates the Treasury must offer on new and refinanced debt, raising the nominal cost going forward.
Inflation-linked securities complicate the picture further. TIPS adjust their principal to the Consumer Price Index, so payments on that portion of the portfolio rise immediately when inflation does. That pushes back against any real-value reduction inflation might deliver on the fixed-rate side. Between 2021 and 2025, both forces were visible at once: interest as a share of GDP more than doubled, from 1.49 percent to 3.15 percent, driven by the higher rates the Fed imposed to fight inflation and by the debt’s continued growth.10Federal Reserve Bank of St. Louis. Federal Outlays: Interest as Percent of Gross Domestic Product Inflation can help at the margins. It does not come close to offsetting the interest cost of a $38 trillion debt.