U.S. debt tops $31 trillion for first time

Report shows low interest rates being replaced with higher borrowing costs

WASHINGTON — America’s gross national debt exceeded $31 trillion for the first time Tuesday, a grim financial milestone that arrived just as the nation’s long-term fiscal picture has darkened amid rising interest rates.

The breach of the threshold, which was revealed in a Treasury Department report, comes when historically low interest rates are being replaced with higher borrowing costs as the Federal Reserve tries to combat rapid inflation. While record levels of government borrowing to fight the pandemic and finance tax cuts were once seen by some policymakers as affordable, those higher rates are making America’s debts more costly over time.

The new figures come as investors veer between fears of a global recession and optimism that one may be avoided. On Tuesday, markets rallied close to 3%, extending gains from Monday.

Higher rates could add $1 trillion to what the federal government spends on interest payments this decade, according to estimates from the Peter G. Peterson Foundation, which promotes deficit reduction. That is on top of the record $8.1 trillion in debt costs that the Congressional Budget Office projected in May.

Expenditures on interest could exceed what the United States spends on national defense by 2029 if interest rates on public debt rise to be just 1 percentage point higher than what the CBO estimated over the next few years.

The Fed, which slashed rates to near-zero during the pandemic, has since begun raising them to try to tame the most rapid inflation in 40 years. Rates are now set in a range between 3% and 3.25%, and the central bank’s most recent projections saw them climbing to 4.6% by the end of next year — up from 3.8% in an earlier forecast.

The Committee for a Responsible Federal Budget estimates that President Joe Biden’s policies have added nearly $5 trillion to deficits since he took office. That projection includes Biden’s signature $ 1.9 trillion economic stimulus bill, a variety of new congressionally approved spending initiatives and a student loan debt forgiveness plan that is expected to cost taxpayers nearly $400 billion over 30 years.

White House budget officials estimated in August that the deficit would be just over $1 trillion for the 2022 fiscal year, which was nearly $400 billion less than they had originally forecast. Biden says those numbers are the product of his policies to stoke economic growth, like the American Rescue Plan.

“We brought down the deficit $350 billion the first year and nearly $1.5 trillion this year,” Biden told a Democratic National Committee event in Washington last month.

Much of the deficit reduction Biden is championing reflects the fact that he and former President Donald Trump signed laws that borrowed heavily in order to mitigate the damage of the pandemic recession. The deficit has fallen in large part because policymakers did not pass another large round of pandemic aid this year.

Biden’s budget office now expects the deficit to rise higher than previously expected over the next three years, largely because of higher interest costs as a result of rising rates. In recent weeks, borrowing costs have climbed even higher than the White House expected.

In recent weeks, administration officials have walked a thin line on deficits. They have championed deficit-cutting moves — like the climate, health care and tax bill Biden signed into law in August — as necessary complements to the Fed’s efforts to bring down inflation by raising interest rates.

They have said Biden would be happy to sign further deficit cuts into law, in the form of tax increases on high earners and large corporations.

Top administration officials have said since Biden took office that plans for expensive investments were fiscally responsible because interest rates were so low. At her confirmation hearing last year, Treasury Secretary Janet Yellen pointed to rock-bottom borrowing costs as justification for ambitious spending proposals and stimulus measures.

Critics of the Biden administration’s spending initiatives have warned that a reliance on low interest rates to justify expansionary policies could come back to bite the United States’ economy as the debt burden mounts.

Brian Riedl, a senior fellow at the Manhattan Institute, said the United States is unwise to make long-term debt commitments based on short-term, adjustable interest rates. Adding new debt, he said, as interest rates rise would be pouring fuel on a fiscal fire.

“Washington has engaged in a long-term debt spree and been fortunate to be bailed out by low interest rates up to this point,” Riedl said. “But the Treasury never locked in those low rates long term, and now rising rates may collide with that escalating debt with horribly expensive results.”

“We brought down the deficit $350 billion the first year and nearly $1.5 trillion this year,”

— President Joe Biden