New Report: Low Interest Rates Won’t Sustain Growing Federal Deficit

Even with continued low interest rates, the U.S. debt will swell to 200% of GDP in 30 years

NEW YORK, NY — Even as the U.S. budget deficit is set to surpass $1 trillion this year, the public remains largely indifferent to the soaring national debt. Politicians on both sides of the aisle continue to promise trillions more in deficit spending without considering the long-term effects on the economy. A new study by Manhattan Institute senior fellow Brian Riedl argues that it’s time for the public to wake up: The federal debt is rising so rapidly that even continued low interest rates will not be sufficient to keep it in check.

Some economists and commentators assert that low interest rates make debt affordable, and in many cases worthwhile. But even assuming continued low rates, within 30 years, the federal debt is expected to swell to 200% of GDP. By that time, just the cost of interest on the debt will consume 42% of all tax dollars and become the largest single expenditure in the federal budget.

If interest rates rise, as they likely will, Riedl calculates that each additional percentage point rise in interest rates would cost the government $1.8 trillion over the decade, and $11 trillion over 30 years. A two-point rise would cost $22 trillion over 30 years, which is greater than the entire Social Security shortfall. A three-point rise would cost $33 trillion—nearly as much as the entire defense budget over the next three decades.

This debt is almost entirely driven by Social Security and Medicare, which will together run a $103 trillion cash shortfall over the next 30 years. Riedl argues that responsible lawmakers should begin gradually implementing sustainable reforms to these programs now, rather than running up a historic debt on the unlikely gamble that the U.S. economy can absorb it.

Click here to read the full report.