US Interest Bill Tops $1 Trillion for First Time, Crowding Out Other Spending

For the first time in American history, the federal government's annual interest bill has crossed $1 trillion — and the milestone is less a warning shot than confirmation of a slow fiscal erosion that budget experts say is already reshaping what Washington can afford to do.

Net interest costs on the public debt reached $1.05 trillion in fiscal year 2026, which ended September 30, up more than 8% from $970 billion the prior year, according to Treasury Department data. The Peter G. Peterson Foundation places that figure at 3.2% of gross domestic product, a share that eclipses the previous record, set in 1991. The federal deficit for the year came in at nearly $2 trillion.

Interest payments now rank as the third-largest item in the federal budget, behind only Social Security and Medicare, and ahead of defense and Medicaid. They have more than doubled since 2022. A separate gross figure — which includes intra-governmental payments to trust funds — reached more than $1 trillion. The Congressional Budget Office puts net interest at $1.14 trillion, up 11% from the prior year.

Two forces are driving the surge. One key measure of publicly held debt now exceeds $32 trillion — roughly $10 trillion more than five years ago. At the same time, the average rate the government paid on marketable Treasuries climbed to 3.52% by the end of September — more than twice the 1.47% it paid five years earlier. Current yields are higher still: Bloomberg's US Treasuries index now sits around 5%, and the 10-year Treasury yield closed at 5.21% on one recent day, its highest close since 2002.

It doesn't seem like a crisis — it's kind of a slow eating away of fiscal capacity.— Louise Sheiner, senior fellow, Brookings Institution and former Federal Reserve economist

Sheiner added that what remains unknown is the point at which some lenders decide to stop lending to the US — and if that happens, it could lead to a fiscal crisis in which the Treasury loses access to capital markets.

Congressional Budget Office Director Phillip Swagel offered a similarly cautious read at an October 8 event in Minneapolis, acknowledging the government is managing for now but warning of a compounding risk. Should a negative shock push interest rates higher, he said, the effect feeds into the deficit, feeds into the debt, and feeds back into interest rates and the broader economy — a dynamic he called a 'turbocharger effect.' Separately, his agency projected in February that the debt-to-GDP ratio will reach a record above 106% in 2030.

Anytime there's a negative shock, interest rates rise for whatever reason there can be a 'turbocharger effect.'— Phillip Swagel, Director, Congressional Budget Office

The International Monetary Fund delivered a blunter verdict. Speaking to reporters at its annual meetings in Bangkok, Managing Director Kristalina Georgieva said growth 'cannot deliver fast enough the necessary adjustment' and that 'some measures will be necessary.' She called on policymakers to 'make urgent repairs to the fiscal house before the cracks widen,' pointing to higher revenues, rationalized spending, and improved public financial management.

That assessment puts the IMF in direct tension with Treasury Secretary Scott Bessent, who did not attend the Bangkok meetings. Bessent has maintained that the country faces a spending problem rather than a revenue problem, and that combining spending restraint with 3% annual growth means 'we grow our way out of this.' Before the House Financial Services Committee, he said 3% growth is 'when we start bending the debt curve and actually start paying down debt.'

Independent analysts are skeptical. Benn Steil, senior fellow at the Council on Foreign Relations, called consistent 3% growth 'highly unlikely' given the economy's performance over the past two decades. Reaching 3.3% annual growth would be required merely to keep the debt-to-GDP ratio from rising further, according to the Committee for a Responsible Federal Budget, while the CBO foresees average annual growth of only 1.8% over the next decade. At that pace, Steil said, debt held by the public reaches 108% of GDP by 2030, up from roughly 100% today.

Spending on items important to the American people, such as defense and healthcare, will need to be cut.— Benn Steil, senior fellow and director of international economics, Council on Foreign Relations

Bessent and other Trump administration officials have pointed to the artificial intelligence boom as a growth catalyst that could help reduce the debt ratio. Budget experts are skeptical of that argument too, noting that defense and entitlement spending appears set to keep rising while GDP gains are unlikely to generate revenues fast enough.

A fiscal apocalypse is not upon us just yet.— Gennadiy Goldberg, head of US interest rates strategy, TD Securities

Goldberg's cautious reassurance rests on one key dynamic: the US nominal GDP growth rate — which drives corporate revenues and tax receipts — remains above Treasury yields. For the second quarter, the year-on-year nominal GDP gain came in at 6.3%. Demand at Treasury auctions has remained solid, and higher borrowing costs have not yet choked off credit flows.

But the math of future rate moves is stark. TD Securities calculates that a 100-basis-point rise across the yield curve would add $310 billion to 2027 interest costs alone. According to the CBO, deficits would swell by nearly $2 trillion through 2036 if rates run 50 basis points above its February projections, and by $6 trillion if they run 150 basis points higher. On one recent day, the 10-year Treasury yield had already settled more than 100 basis points above what the CBO projected in February, according to the Committee for a Responsible Federal Budget.

The Federal Reserve is anticipated to lift its overnight benchmark rate — currently set in a range of 3.75% to 4% — at least one more time, a move that would increase costs on the short-term debt Bessent has increasingly favored issuing.

With debt so high, net interest payments really matter — they will lead to a snowballing of debt. The increase in interest rates and in interest payments relative to GDP, that may bring public pressure for action.— Karen Dynan, economics professor, Harvard University, and former Treasury official

When interest costs as a share of debt last approached today's levels, Washington responded with notable policy shifts. President George H.W. Bush signed a package of tax increases in 1990, breaking his no-new-taxes pledge, just before the interest-cost ratio peaked. His successor Bill Clinton raised taxes further in 1993. The end of the Cold War also reduced defense spending, and a late-1990s economic boom driven by the spread of the internet and personal computing lifted revenues. No comparable combination of forces is visible today.

The problem's only getting worse, so we shouldn't be debating whether to wait for the catastrophe — we should be working on it now. It's going to be really hard to climb out of this problem.— Brett Loper, executive vice president of policy, Peter G. Peterson Foundation

Why it matters — At $1 trillion a year and rising, interest payments are crowding out other federal spending and leaving the government increasingly exposed to any economic shock that pushes rates higher — a dynamic that affects everything from defense budgets to social programs to the cost of future borrowing.

Sources differ on Whether the US can grow its way out of its debt burden: Yes — with spending restraint and 3% growth, 'we grow our way out of this' (eurasiareview.com (quoting Treasury Secretary Bessent)) vs No — growth 'cannot deliver fast enough the necessary adjustment'; fiscal measures are necessary (eurasiareview.com (quoting IMF Managing Director Georgieva)) vs Highly unlikely — consistent 3% growth is implausible given the past two decades; 3.3% growth needed just to stabilize debt ratio (eurasiareview.com (quoting Benn Steil, Council on Foreign Relations))

Reported by bloomberg.com, finance.yahoo.com, eurasiareview.com, primerates.com, firstpost.com