The Interest Burden of the Federal Debt

I. Some Basics on Government Deficits and Debt

The government runs a budget deficit, and the Treasury borrows, when tax receipts fall short of government expenditures. A government budget deficit occurs when revenue falls short of spending. This gap is covered by borrowing – the Treasury issues financial securities. This borrowing to support government operations can be sound policy, for example, to finance responses to temporary shocks such as wars and recessions. Borrowing allows stable tax rates as spending needs increase and decrease with wars, pandemics, and other crises. The stability of tax rates allows for better planning by companies and households.

The government budget deficit in any year represents that year’s borrowing needs for current operations plus the interest payments on outstanding debt. The primary deficit represents the difference between the government’s spending and revenue excluding payments on its debt. The chart shows the primary deficit and the overall deficit of the federal government over the last 65 years. The distance between these lines in any year represents that year’s interest payment on the debt. In fiscal 2025 (the twelve-month period from October 1, 2024 to September 20, 2025) the United States government had receipts of $5.2 trillion and outlays of $7.0 trillion, meaning that the total deficit was $1.8 trillion. The overall deficit consisted of $1.0 trillion in net interest payment on the stock of outstanding federal debt and a primary deficit of $0.8 trillion. Scaling by the national income (as typically measured by GDP) allows for comparisons over time in an economy of changing size and is useful when making cross-country comparisons. In the fiscal year ending in September 2025, the United States’ GDP was $30.6 trillion. This means that the fiscal year 2025 government budget deficit was about 5.9 percent of GDP, the primary deficit was about 2.6 percent of GDP and interest payments were about 3.3 percent of GDP.

The government’s debt is its accumulated deficits. The gross debt of the United States includes some debt that is issued by the Treasury and held by other government entities, for example, in the trust fund maintained to fund Social Security payments. The debt held by the public is the gross debt minus intragovernmental debt. (Because of the independence of the Federal Reserve System debt held by the Federal Reserve is typically included in measures of the federal debt held by the public.) The debt that is held by the public presents a clearer and more accurate picture of net indebtedness of the federal government as a whole. In December 2025 the gross debt was $38.4 trillion, the debt held by the public was $30.8 trillion, and intragovernmental debt was $7.6 trillion. Expressed as a ratio to GDP, the publicly-held-debt-to-GDP ratio is 101% and the gross debt to GDP ratio is 125%. The ratio of publicly-held debt to Gross Domestic Product is the most relevant indicator of the government’s indebtedness.

The change in the debt-to-GDP ratio over time reflects the primary deficit, the interest payments on the debt, and the growth rate of the economy. Specifically, the change in the debt-to-GDP ratio will approximately equal the primary deficit as a share of GDP, plus the debt-to-GDP ratio times the difference between the interest rate and the growth rate of the economy. For example, if the debt-to-GDP ratio is 100 percent, the primary deficit is 1 percent of GDP, the interest rate is 5 percent and the growth rate of the economy is 4 percent, then the debt-to-GDP ratio will grow by approximately 2 percent (=1% + (100% x (5% – 4%)). Interest rates have risen and fallen over time. Interest rates rose between the early 1960s and 1981, with the yield on 10-year US Treasury bonds reaching a high of 15.8 percent in 1981. Yields then fell to a low of 0.55 percent in 2020 and have since risen back to current levels, which are high relative to the 2010s but not unusual by historical standards.

The ratio of publicly-held debt to GDP fell in the wake of World War II but has grown since the 1970s. Debt held by the public as a share of GDP was 106 percent in 1946 because of World War II military expenditures. This ratio declined to 51 percent ten years later, and declined further to 23 percent by 1974. Since that time, there have been periods of rapid growth in the debt-to-GDP ratio, including in the aftermath of the 2007-2009 financial crisis and during the Covid-19 pandemic. Over the period between 1995 and 2024 US GDP has grown at 4.8 percent per year and interest rates have averaged 3.7 percent per year. That excess of the growth rate over interest rates means that the economy could have had a stable debt-to-GDP ratio of 50 percent with a primary deficit equal to 0.55 percent of GDP. The low interest rate levels relative to economic growth rates during the period between 1995 and 2024 has meant that over the last three decades the impact of the US federal primary deficits on the increases in the debt-to-GDP ratio have been lower than they would have been in a higher interest rate or lower growth environment.

II. Government Borrowing

Some basic principles about bonds

• A Bond is a financial instrument that obligates an issuer (for our discussion, the issuer is the United States Treasury) to make future payments to its holder. These payments, called “coupon payments”, may be a fixed amount or may vary over time. A “zero-coupon bond” makes no periodic coupon payments, rather its entire return is a payment of the par value at maturity. Other bonds offer “coupon payments” over the maturity of the bond as well as a “par value” (or “face value”) when the bond reaches maturity. For example, a ten-year bond might have a par value of $1,000. At the bond’s maturity date, the issuer will pay the investor the bond’s par value. This bond may also make periodic coupon payments, for example, $50 each year for ten years.
• At any point prior to its maturity, a bond will have both a market price and a yield. The market price is the price that the bond would sell for. The yield is defined as the interest rate that, when applied to the bond’s future payments, puts today’s value on these payments (the “present value”) that is equal to the bond’s actual current price. For example, a one-year bond that has the face value of $1,000 and a market price of $952.38 would have a yield of 5% ($1,000/$952.38 = 1.05). The yield on a bond that makes fixed annual coupon payments of $50 each year for 10 years, pays a par value of $1,000 at maturity, and is currently price at $1000 will have a yield of 5 percent per annum because the sum of the present value of the five $50 payments and the par value at the end of 5 years is $1,000 ($50/(1.05)¹ + $50/(1.05)² + $50/(1.05)³ + $50/(1.05)⁴ + $50/(1.05)⁵ + $1,000/(1.05)² = $1,000).
• The market price and the yield are related to each other and move in opposite directions. Prices and yields move in opposite directions because the value of a payment in the future is worth more today if the prevailing market interest rate is lower. In the example above, if the prevailing market interest rate is 8% then the value of $1,000 in one year is lower and the one-year bond’s price falls to $925.93 ($1,000/$925.93 = 1.08) because its interest rate must be the same as what is available for comparable bonds. If the prevailing market interest rate decreases to 4.55% then the one-year bond’s price rises to $1100. The price of the 5-year bond would rise to $1,044.52 if the prevailing market interest rate were 4% rather than 5% because the present value of future payments would be higher ($50/(1.04)¹ + $50/(1.04)² + $50/(1.04)³ + $50/(1.04)⁴ + $50/(1.04)⁵ + $1,000/(1.04)² = $1,044.52).

The debt-to-GDP measure is typically calculated using the par value of federal government debt but the market value of the debt provides a more accurate measure of the true cost of future payments. The par value of a bond is the amount that the bond will pay at maturity. But before maturity the bond’s market price will be determined by supply and demand and can be different from its par value: below par if its yield is higher than its coupon rate and above par if its yield is below its coupon rate. One can also construct debt-to-GDP measures using the market value of outstanding government debt. Because the market value of outstanding debt will fall when interest rates rise, market value debt measures will be lower than measures calculated using par values in periods following interest rate increases. For example, the market value of privately held federal debt was lower than its par value in every month between March 2022 and November 2025 with an average monthly difference of $1.27 trillion.

The United States Treasury borrows from the public using different types of financial instruments. Of the $30.8 trillion in total federal debt held by the public:

• $0.6 trillion is “nonmarketable” in the sense that the bonds are savings bonds purchased by and registered to individual American savers who will hold these bonds to maturity. 
• $6.7 trillion are “Treasury bills”, zero-coupon securities that when issued have maturities of up to one year. 
• $15.5 trillion are fixed-coupon “Treasury notes”. The Treasury uses the terminology “notes” to describe securities that at issuance have maturities between 2 years and 10 years. 
• $5.2 trillion are fixed-coupon “Treasury bonds”. The US Treasury uses the term “bond” in this context specifically to mean securities that when issued have maturities of between 20 and 30 years. A “Treasury bond” that was issued 10 years ago and when issued had a 20 year maturity will have a remaining maturity of 10 years, and for all practical purposes may be the same as a newly-issued 10-year Treasury note. All of the securities described in this section are bonds, but the Treasury will use the term “Treasury bond” versus “Treasury note” based on the specific maturity of the instrument at its issuance.
• $2.1 trillion in “Treasury Inflation Protected Securities”, or TIPS. TIPS pay investor coupons and principal payments that are indexed based on the CPI-U measure of inflation.
• $0.7 trillion in floating-rate notes. These securities, when issued, have maturities of 2 years. Unlike fixed-coupon notes, the coupon payments of floating-rate notes will be adjusted with changes in prevailing market interest rates. Floating-rate bonds typically pay coupons that adjust to a benchmark. Treasury-issued floating-rate notes (FRNs) have 2-year maturities at issuance and make coupon payments that track an index based on the interest rates on Treasury 13-week bills.

III. Debt Management

The CBO’s projections of the interest burden of federal debt have increased dramatically over the past four years. These increases have reflected changing expectations about the future paths of both interest rates and debt. The recent tax law changes (the “One Big Beautiful Bill Act”, or OBBBA) have had a large impact on the CBO’s projections of future interest payments and debt levels. The CBO’s June 2024 forecast projects that net interest spending will be 16 percent of government outlays by 2034. The forecast also projects that the debt-to-GDP ratio will continue increasing to levels that have no precedent in American history. The figure shows the increase in interest payments on the Federal debt as a percentage of government spending, and also illustrates how, over the past 5 years, the estimates of future values of this percentage have risen.

Click here for a larger version of the graph.

The US Treasury considers tradeoffs when deciding what types of securities to issue to roll over existing debt and finance new primary deficits. One decision involves the maturity structure of its new debt issuance. Issuing short-maturity debt can be attractive because short-term interest rates are frequently below longer-term interest rates. For example, at the beginning of 2026, yields were 3.71 percent for US Treasury securities with 1 month to maturity and 4.85 percent for 30-year US Treasury bonds. But issuing short-maturity debt can make the Treasury more vulnerable to movements in interest rates.

The maturity profile of US Treasury debt will determine how quickly increases in interest rates pass through to affect the Treasury’s net interest payments on the debt. If all of the borrowing was in the form of 30-year fixed coupon bonds, an increase in market interest rates would pass through to required net interest payments very slowly. As of mid-2025, 61 percent of outstanding Treasury debt was scheduled to mature by the end of 2028. This means that the recent increases in market interest rates, if sustained, will quickly pass through to required net interest payments. This rapid passthrough to required interest payments will require some combination of increases in taxes, reductions in non-interest outlays, and market willingness to accept higher (and increasingly unprecedented) debt-to-GDP levels for the United States government.

IV. Policy Implications

The interest payments on the publicly-held debt benefit the debt holders – but some proportion of the debt is held by foreign citizens and does not circle back to American citizens. Debt held by American citizens is, in some sense, money owed to ourselves. But debt is also held by foreigners. For example, in October 2025, $9.2 trillion of Treasury securities was estimated to be foreign-held; this represents about 30 percent of publicly held Treasury securities. The biggest foreign holdings of these securities include Japan ($1.2 trillion), the United Kingdom ($878 billion), and China ($689 billion). About 42 percent of the foreign holdings ($3.88 trillion) were held in official accounts (e.g. central banks).

There have been calls for the Federal Reserve to lower interest rates and part of the motivation is to reduce the interest cost of the debt – but there are reasons to believe that this would not help. While the Federal Reserve has some control over shorter-maturity interest rates, longer-maturity rates, such as the 10-year Treasury rate, is market determined. Long-term interest rates reflect a variety of factors, including expectations of future short-term rates, expectations of future inflation, and the risks of inflation and interest rate changes. When the Federal Reserve lowers interest rates through expansionary policies that can put upward pressure on inflation. Higher expected inflation leads to lenders demanding higher interest rates to prevent the erosion of the value of repayments of loans.

One way that the debt-to-GDP ratio can be reduced is through inflation – but the extent to which this occurs depends upon the maturity structure of the debt and whether it has a fixed or adjustable interest rate. Most current government debt will mature within a few years. When this debt is rolled over it will be at prevailing market interest rates – and, as mentioned above, higher inflation, or higher expected inflation, will be reflected in higher interest rates.

Another means to reduce the debt-to-GDP ratio is through financial repression. Financial repression occurs when the government regulates borrowing and lending. Some forms of financial repression can make it less expensive for governments to borrow and pay debt service – for example, forcing banks to hold some proportion of their reserves in the forms of government securities. It has been recently argued that the post-2009 liquidity requirements for American banks (which required them to hold highly liquid securities) amounted to a form of “financial repression” of the type that the US had during the 1950s. Financial repression of this type would seem to run counter to the current political environment that favors greater deregulation.

V. Conclusions

The interest cost of the federal debt is projected to be an ever-increasing proportion of federal spending. This is a burden insofar as it makes fewer resources available for other needs such as national defense, infrastructure, and the social safety net.