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What If Interest Rates Are 1 Point Higher? $1.9 Trillion in Extra Costs

Apr 19, 2018 | Budgets & Projections

Interest costs are the fastest growing part of the budget, with the Congressional Budget Office (CBO) projecting interest payments will more than triple over the next decade, from $263 billion in 2017 to $915 billion in 2028. 

Rising interest costs are the result of both growing levels of debt and rising interest rates. Debt held by the public will nearly double from $15 trillion today to $29 trillion by the end of the decade. Interest rates are also projected to rise, with the rate on 10-year Treasury notes increasing from today's 2.9 percent to stabilize around 3.7 percent over the medium-term, significantly below the historical average.

What would happen if interest rates rise even faster or higher than expected? In January 2017, CBO noted that if interest rates were 1 point higher than projected each year, the cumulative added costs would be $1.6 trillion. Since that time, Congress has added significantly to deficits with tax cuts and spending increases. Now that debt is projected to be higher, rising interest rates would have a larger effect. In March, we had thought the number might climb as high as $2 trillion, but CBO's debt projections were slightly lower than ours.

Based on the latest CBO projections, we now project that if interest rates were 1 point higher than CBO currently projects each year, the amount spent on interest would be $1.9 trillion higher over ten years. Debt as a share of the economy, currently at 77 percent, would rise to 103 percent of GDP by 2028, rather than 96 percent as under current law.