Interest costs: the silent squeeze
Net interest outlays are now the fastest-growing item in the federal budget. The CBO expects interest payments to exceed $900 billion in 2025, up from $352 billion in 2021. That means roughly one of every seven federal dollars goes to servicing debt.
Table 1. Federal Interest Burden
| Metric | 2021 | 2023 | 2025 (f) |
|---|---|---|---|
| Net Interest ($ B) | 352 | 659 | 930 |
| Interest % of Total Outlays | 6 % | 11 % | 14 % |
| Effective Avg. Rate on Debt (%) | 1.6 | 2.8 | 3.5 |
Sources: U.S. Treasury, CBO.
Table 2. Historical Comparison (Nominal $ B)
| Year | Defense Spending | Net Interest |
|---|---|---|
| 2000 | 295 | 223 |
| 2010 | 693 | 196 |
| 2025 (f) | 920 | 930 |
Source: OMB Historical Tables.
Why it matters
Rising interest costs constrain fiscal flexibility. Even modest yield increases compound quickly when debt exceeds $34 trillion. Every 100 basis-point rise adds roughly $300 billion annually to servicing costs.
Market perception
So far, Treasury demand remains strong, but the investor base is shifting. Foreign holdings have declined to 28 percent of total, while domestic funds and households are absorbing the gap.
Strategic implications
Persistent high real rates may anchor a structurally stronger dollar but also elevate long-term borrowing costs for corporations. Executives should stress-test balance sheets for sustained yields above 4 percent and explore fixed-rate debt restructuring while markets remain orderly.