Interest is the compounding engine inside deficit spending: it is a mandatory cost the government pays before anything else, and because the Treasury usually has to borrow to pay it, each year’s interest bill enlarges the next year’s debt and the next year’s interest. In fiscal year 2025, the federal government spent roughly $970 billion on interest, and the Congressional Budget Office projects that number will reach about $1 trillion in 2026. That is why the role of interest in deficit spending is so outsized: it turns a one-year gap between revenue and spending into a decades-long obligation that keeps growing on its own.
Deficit, Debt, and Where Interest Fits
A deficit is the single-year gap between what the federal government spends and what it collects. The Treasury fills that gap by selling securities to investors.1U.S. Treasury Fiscal Data. Understanding the National Debt Each year’s deficit stacks onto the pile of past deficits, and that pile is the national debt, which exceeded $38 trillion in late 2025.2Federal Reserve Bank of St. Louis. Federal Debt: Total Public Debt About $28 trillion of that is debt held by the public, and that is the portion the interest conversation centers on.
Every security the Treasury sells carries a promise to pay interest. That promise is what connects a past deficit to a present budget line.
Why Interest Payments Cannot Be Cut
Interest on federal debt is classified as mandatory spending because it flows from a permanent appropriation.3Congress.gov. Trends in Mandatory Spending Congress cannot vote to pay less interest this year the way it can trim a discretionary program. The payments go out regardless of the broader budget picture.
The reason is that a missed payment would be a default, and Treasury securities are priced globally as the safest asset on the market. Even a brief technical default would likely cause investors to demand a permanent risk premium, raising borrowing costs on every future deficit. So the interest line is paid first, and everything else in the budget is built around it.
The Feedback Loop That Enlarges the Deficit
When tax revenue in a given year cannot cover both the government’s spending and its interest obligation, the Treasury borrows more to make up the difference.4U.S. Treasury Fiscal Data. Federal Spending That new borrowing adds to the principal. A bigger principal means more interest the following year. More interest means a bigger deficit. The deficit is financed with still more borrowing. The cycle feeds itself.
The clearest proof of this loop lives in the difference between two numbers budget analysts track separately. The total deficit is the full gap between spending and revenue. The primary deficit strips interest out, showing the mismatch between what the government spends on programs and services and what it collects in taxes. Over the past 50 years, total deficits have averaged 3.8 percent of GDP, while primary deficits averaged 1.7 percent.5Peter G. Peterson Foundation. What Is the Primary Deficit The gap between those two averages, more than two percentage points of GDP, is interest. Across half a century, interest has roughly doubled the apparent size of the federal government’s fiscal imbalance.
What Determines the Size of the Interest Bill
How Much Is Owed
The most direct driver is the principal itself. As of September 2025, the weighted average interest rate on outstanding marketable debt was 3.406 percent.6Joint Economic Committee. Interest on Debt Projected to Increase That modest-sounding rate applied to roughly $28 trillion in publicly held debt is what produces the trillion-dollar annual bill. Even if rates held perfectly flat, a growing debt would keep pushing the cost up.
The Rate Environment
The rate the Treasury pays is shaped by Federal Reserve policy, inflation expectations, and global appetite for U.S. securities. Short-term Treasury yields track the federal funds rate closely. Long-term yields follow their own logic. In late 2024, the Fed was cutting rates while the 10-year Treasury yield rose by 79 basis points, driven in part by investor expectations about future debt levels.7Committee for a Responsible Federal Budget. As the Fed Cuts Rates, Treasury Yields Are Rising When foreign investors see U.S. debt as less attractive, the Treasury has to offer higher yields to clear its auctions, and those higher yields show up in future interest bills.8Federal Reserve Bank of St. Louis. How Might Increases in the Fed Funds Rate Impact Other Interest Rates
The Maturity Mix
The Treasury balances short-term bills against long-term notes and bonds. Short-term debt usually carries lower rates but must be refinanced quickly, exposing the government to rate spikes. Long-term debt locks in a rate for 20 or 30 years but typically costs more upfront. That mix determines how fast rising rates feed into the annual interest line.
How Big the Interest Bill Has Become
In FY 2025, interest consumed about 19 cents of every dollar of tax revenue collected. Federal interest payments reached 3.15 percent of GDP in 2025, up from 1.49 percent just four years earlier.9Federal Reserve Bank of St. Louis. Federal Outlays: Interest as Percent of Gross Domestic Product CBO projections put that figure at 3.3 percent of GDP in FY 2026.
The government now spends more on interest than on national defense or Medicare, and interest is the fastest-growing major component of the federal budget. It is projected to reach roughly $2.1 trillion annually by 2036, essentially doubling over the decade.10Committee for a Responsible Federal Budget. Net Interest Costs Will Double, Again, Over the Next Decade
Where the Interest Money Goes
Foreign investors held about $8.5 trillion of publicly held debt in late 2024, roughly 30 percent of the total. About 44 percent of that foreign-held debt sat with foreign governments and central banks; the other 56 percent was held by private investors overseas.11Congress.gov. Foreign Holdings of Federal Debt Interest flowing to foreign holders leaves the U.S. economy. The remaining 70 percent of publicly held debt is owned domestically, by the Federal Reserve, pension funds, mutual funds, banks, insurance companies, and individual investors. Those payments stay in the country, but they still represent tax dollars diverted to debt service rather than government programs.
What a Larger Interest Bill Crowds Out
As interest claims a larger share of the budget, fewer tax dollars are left for everything else. Infrastructure, research, defense, and social programs all compete for whatever remains after the non-negotiable interest line is paid. The squeeze is sharpest during economic crises, when the government typically needs to spend more and already-elevated baseline interest obligations eat into the room to do so.
Heavy federal borrowing can also raise borrowing costs across the broader economy. When the Treasury competes aggressively for available capital, other borrowers face higher rates on corporate loans, mortgages, and business financing. Economists call this crowding out. The magnitude is debated, but the mechanism is straightforward: more demand for the same pool of lendable funds raises the price of borrowing.
There is also an intergenerational dimension. Today’s deficit spending delivers benefits to today’s taxpayers, but the interest obligations run decades forward. Future taxpayers inherit both the principal and the ongoing interest, dedicating a growing share of their revenue to past consumption rather than their own priorities.
Does Inflation Make the Interest Problem Go Away?
Not really. Inflation increases nominal GDP, which makes existing fixed-rate debt look smaller in relative terms. A bond issued at 3 percent effectively costs less in real terms when inflation runs at 4 percent. But inflation also pushes up the rates the Treasury must offer on new and refinanced debt, driving up the nominal cost of future borrowing.
Inflation-linked securities complicate the picture further. TIPS adjust their principal based on the Consumer Price Index, so the government’s payments on those securities rise automatically with inflation. The debt portfolio is a mix of fixed-rate and inflation-linked instruments, and the inflation-linked share pushes back against any real-value erosion. Between 2021 and 2025, interest as a share of GDP more than doubled, from 1.49 percent to 3.15 percent, driven by both the higher rates the Fed imposed to fight inflation and the growth of the debt itself.9Federal Reserve Bank of St. Louis. Federal Outlays: Interest as Percent of Gross Domestic Product Inflation can help at the margins. It does not come close to offsetting the interest cost of a $38 trillion debt.