WASHINGTON, D.C. – Today, House Budget Committee Republican Leader Jason Smith (MO-08) released a report titled “The Consequences of Higher Interest Rates to the Federal Budget.”
The report follows yesterday’s announcement by the Federal Reserve that it is raising the Federal Funds Rate by an additional 50 basis points, the second rate increase since March. The latest Fed actions continue an attempt to curtail the worse inflation crisis in over 40 years, fueled by the trillions in additional spending ushered through Congress in 2021 by President Biden and Congressional Democrats, including the $2 trillion American Rescue Plan Act. This rise in inflation—currently at a rate of 8.5 percent year-over-year—has crushed the disposable incomes of millions of middle-class working families as the price of goods continues to rise faster than wages. The Fed’s response to raise rates will now have an additional crushing impact on the cost of borrowing to cover the massive debts in Washington—threatening to crowd out vital government functions and private investment in the economy.
“This report shows a real and concerning impact to America’s debt and our ability to finance that debt in an environment where interest rates are on the rise,” said House Budget Committee Republican Leader Jason Smith (MO-08). “The $2 trillion Biden Bailout Bill that Democrats enacted last year ignited inflation, which has risen 10.4 percent since Joe Biden took office. The Federal Reserve has no choice but to raise rates to combat Biden’s inflation crisis, but the impact of those rate hikes will be felt through the borrowing costs for employers, small businesses, farmers, and the federal government as well.
“The consequences of higher interest rates to the federal budget are not simply hypothetical concerns; they are real and present today. The last time inflation was this high, rates went all the way up above 10 percent. Such a scenario would simply be catastrophic for our country’s economic growth and bottom line. The American people are going to see a larger and larger share of their federal tax dollars going just to pay interest on an ever-expanding mountain of government debt. As interest payments on the debt climb as a share of the federal budget, the ability of the federal government to respond to future economic, public health, and international challenges will be greatly compromised.”
Today’s report from House Budget Committee Republican Leader Smith examines five different scenarios for interest rates assuming spending and revenue projections under current law. In each scenario, the analysis finds that rising interest rates would both increase the debt and annual debt interest payments to unsustainable levels:
- CBO Baseline Interest Rate Forecast – 3.0 Percent Average: Federal public debt climbs to $134 trillion by 2051. Interest payments on the debt climb from $331 billion in 2021 to almost $6 trillion per year in 2051.
- CBO Higher Interest Rate Scenario – 3.9 Percent Average: Federal public debt climbs to $173 trillion by 2051. Interest payments on the debt grow from $331 billion in 2021 to $10 trillion per year in 2051.
- Interest Rate at 50-year Average – 5.7 percent: Federal public debt climbs to $215 trillion in 2051. Interest payments on the debt grow from $331 billion in 2021 to $11 trillion per year by 2051.
- Interest Rate at Level of 1990s – 6.9 percent: Federal public debt climbs to $280 trillion in 2051. Interest payments on the debt grow from $331 billion in 2021 to $18 trillion per year by 2051.
- Interest Rate at 1982 Level – 10.8 percent: Federal public debt climbs to $693 trillion in 2051. Interest payments on the debt would be projected to grow from $331 billion in 2021 to $67 trillion per year by 2051.
Click here to read the full report.
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