The cost of servicing America’s debt has soared to its highest level since the 1990s, raising the spectre of budget concerns limiting the next Washington administration’s policy options.

The Treasury paid a staggering $882 billion in net interest payments during the fiscal year ending in September, equating to a jaw-dropping $2.4 billion per day. As a percentage of G.D.P., the burden hit 3.06%, the highest since 1996.

What is the driving force behind this alarming rise? Historically high budget deficits, largely due to spiralling spending on Social Security and Medicare, extraordinary COVID-related outlays, and the lingering effects of Trump’s 2017 tax cuts. And let’s not forget the impact of rising interest rates—courtesy of inflation. The higher the interest costs, the more politically significant these issues become. The Federal Reserve’s recent decision to lower interest rates has provided a glimmer of hope for the Treasury. The average interest rate on outstanding U.S.U.S. debt dipped to 3.32% at the end of September, marking the first monthly decline in nearly three years. But don’t pop the champagne just yet. The last data from employment and inflation did not go the way of decreasing interest rates.

For the first time ever, the U.S. government’s interest bill exceeded its defence spending. Interest payments consumed 18% of federal revenue, nearly double what they consumed two years ago.
The scale of the interest payments is so vast that it’s become a beast in its own right, adding to the colossal $27.7 trillion national debt—almost 100% of G.D.P. Servicing this debt is one of the fastest-growing parts of the federal budget, and it threatens to drag down economic growth by crowding out private investment. According to the Congressional Budget Office, every extra dollar of deficit spending reduces private investment by 33 cents.

While neither Donald Trump nor Kamala Harris have made deficit reduction a central plank of their campaigns, the growing mountain of debt will be a headache for whoever takes office next. With a deeply divided Congress, all it might take is one fiscally concerned lawmaker to block key spending or tax proposals.

Most economists predict that the debt will continue to balloon, regardless of who wins the next election. The Committee for a Responsible Federal Budget estimates that Harris’ economic plan would add $3.5 trillion to the debt over a decade, while Trump’s would pile on $7.5 trillion.
While the Fed’s rate cuts might eventually ease the Treasury’s burden, the benefit won’t be immediate. Much U.S.U.S. debt maturing in the coming years is locked in at pre-Fed tightening ultra-low rates. When more expensive Treasury bills replace those bonds, the government’s borrowing costs will soar—particularly if the Fed pauses its cuts before reaching pre-COVID levels. The Fed’s short-term rate averaged less than 0.75% in the decade up to 2019, but policymakers expect it to settle around 2.9% in the long run.

Meanwhile, as Social Security and Medicare costs continue to balloon with an ageing population, the budget will remain under severe strain unless reforms are implemented. The growing burden, combined with lawmakers’ reluctance to touch popular entitlement programs, has squeezed discretionary spending—the part of the budget that includes everything from defence to education.

So far, investors haven’t shown much concern about America’s fiscal troubles, with the Fed’s easing cycle and employment worries keeping demand for Treasury bonds strong. But the landscape has changed. The U.S.U.S. used to have more freedom of choice with low rates. That’s no longer the case.