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As America’s gross national debt exceeds $31 trillion for the first time, the fiscal worries for the nation continue to take hold amid soaring interest rates.
The breach of the threshold, which was revealed in the latest Treasury Department report, comes at an inopportune moment, as historically low interest rates are being replaced with higher borrowing costs as the Federal Reserve tries to combat rapid inflation.
While record levels of government borrowing to fight the pandemic and finance tax cuts were once seen by some policymakers as widely affordable, however these higher rates are making America’s debts more costly as time passes.
The new figures come at a volatile economic moment, with investors veering between fears of a global recession and optimism that one may be avoided. On Tuesday, markets rallied close to 3 percent, extending gains from Monday and putting Wall Street on a more positive path after a September that offered an extremely bleak outlook.
Higher rates could add an additional $1 trillion to what the federal government spends on interest payments this decade, according to Peterson Foundation estimates. That is on top of the record $8.1 trillion in debt costs that the Congressional Budget Office projected in May 2022.
Expenditures on interest could exceed what the United States spends on national defence by 2029, if interest rates on public debt rise to be just one percentage point higher than what the C.B.O. estimated over the next few years.
Rate increases could cut short what has been a brief period of improvement for the nation’s fiscal picture as it relates to the economy as a whole.
Many have projected that the national debt, measured as a share of the size of the economy, will shrink slightly through the coming fiscal year before growing again in 2024. That is because the economy is expected to grow faster than the debt. Officials also say they are comfortable with the debt and deficit levels in the administration’s forecasts and do not see the nation as anywhere close to an apparent fiscal crisis.
Critics of the Biden administration’s spending initiatives have warned that a reliance on low interest rates to justify visionary policies could come back to bite the United States economy, as the debt burden continues to mount.