The United States has long had the largest defense budget globally, but this expenditure is rapidly being overtaken by the fastest-growing part of the federal budget—interest payments on the debt. In the fiscal year of 2024, the U.S. Treasury's net interest expenditure surpassed defense spending for the first time, with the debt interest burden reaching a 28-year high.

On Friday, October 18th, Eastern Time, the U.S. Treasury announced that for the fiscal year ending September 30, 2024, the U.S. federal government's fiscal deficit reached $1.833 trillion, the third-highest on record, just behind the fiscal years of 2020 and 2021 during the COVID-19 pandemic.

The net interest expenditure for this fiscal year was $882 billion, averaging about $2.4 billion per day, accounting for 3.06% of the U.S. GDP, the highest proportion since 1996. This means that the U.S. debt interest burden has climbed to its highest level since 1996.

According to official U.S. data, for the first time in this fiscal year, the net interest expenditure of $874 billion exceeded defense spending, with interest accounting for about 18% of federal revenue, nearly double that of two years ago.

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In the 2024 fiscal year, the U.S. federal government's total expenditures amounted to $6.75 trillion, an increase of $617 billion, or 10.1%, compared to the 2023 fiscal year, with the ratio to GDP rising from 22.5% to 23.4%. Among them, expenditures on the Social Security program increased by $103 billion, a 7% increase, and defense spending increased by $50 billion, a 6% year-on-year growth.

Analysis points out that a long-term budget deficit at historic highs is a key factor leading to the surge in U.S. unpaid debt. Behind the U.S. budget deficit are the rising expenditures on social security and Medicare, large-scale spending during the pandemic, and the comprehensive tax reform of 2017. In addition, high interest rates have hurt the U.S. government, with the Federal Reserve keeping policy interest rates at a high level not seen in over two decades, exacerbating the government's financial shortfalls.

The huge interest expenditures may also crowd out private investment, dragging down economic growth. The Congressional Budget Office (CBO) estimates that for every additional dollar of deficit-financed spending, private investment will decrease by 33 cents.

Debt and Deficit—A Headache for the Next U.S. Government

The media generally believes that in the upcoming elections, the budget deficit will become a significant challenge for presidential candidates. Although neither Trump nor Harris has made reducing the deficit a core issue, the debt problem remains a hidden concern for the next government.

Whether it is "Harris Economics" or "Trump Economics," there is a common point: the deficit. Both Harris and Trump have expressed their dislike for inflation, but the economic policies they propose may lead to rising prices and an expanded fiscal deficit in the United States.Economists believe that regardless of who is elected, the U.S. debt will continue to rise. The Committee for a Responsible Federal Budget estimates that Harris's economic plan could lead to an increase in debt by $3.5 trillion, while Trump's plan could increase it to $7.5 trillion.

Can lowering interest rates alleviate the debt problem?

The magnitude of the Federal Reserve's interest rate cuts will also affect the fiscal outlook. Although interest rate hikes are quickly reflected in fiscal expenditures, interest rate cuts may take more time to reduce the government's borrowing costs.

Analysis points out that before the Federal Reserve's interest rate hike cycle, a large amount of national debt had low interest rates, and these national debts will mature in the next few years. Afterwards, many low-interest bonds will need to be converted into high-interest bonds, facing higher repayment costs. This situation may continue in the next few years - especially if the Federal Reserve stops cutting interest rates at a higher level than before the pandemic. The Federal Reserve's short-term benchmark interest rate averaged less than 0.75% in the decade before 2019; policymakers predicted in September that interest rates will stabilize at about 2.9% over time.

At the same time, as the aging of the U.S. population intensifies, the costs related to social security and medical insurance will continue to rise. Unless reforms are made, the budget deficits in the United States over the next few decades will be very large.

Currently, investors do not seem to be overly worried about the fiscal challenges in the United States. Wells Fargo Global Strategist Gary Schlossberg said that the Federal Reserve's easing cycle and concerns about a weak job market continue to support demand for Treasury bonds. But if investors start to worry, this could have a significant impact on the U.S. economy. Schlossberg further said:

The situation has changed. In the past, we enjoyed more 'free lunches' - interest rates were lower. You could increase debt, and interest expenses were not significant. But it's obviously not the case now.