U.S. Net Interest Spending Rises to 3.3% of GDP, Deficit Creates National Debt, Interest Creates Next Round of Deficit
The U.S. Congressional Budget Office (CBO) projects that federal net interest spending will reach $1 trillion in fiscal year 2026, accounting for 3.3% of GDP, surpassing the historical peak of 3.2% in 1991.
Net interest spending will increase by $69 billion from 2025, a rise of about 7%; it previously grew by 34% and 10% in the two preceding years. The rising interest costs stem from the expansion of the federal debt stock and the refinancing of maturing bonds in a higher interest rate environment.
According to CBO's baseline forecast, cumulative U.S. net interest spending from 2026 to 2036 will total $16.2 trillion, with annual amounts rising from $1 trillion to $2.1 trillion. During this period, net interest as a percentage of GDP will increase from 3.3% to 4.6%, accounting for nearly one-fifth of total federal spending.
Interest spending has now surpassed defense spending. In fiscal year 2025, U.S. net interest spending will exceed $1 trillion for the first time, making up about 14% of total federal spending, approximately $150 billion more than federal defense spending; this indicates that the debt stock itself has become a larger expenditure item in the U.S. budget than most individual programs.
The structure of the deficit has also changed: the total federal deficit for 2026 is expected to be 5.8% of GDP, with a primary deficit of 2.6% of GDP and net interest at 3.3%. Even excluding interest, the budget remains unbalanced; new debt continues to accumulate, further expanding future interest bills.
Market Mechanism: The U.S. Treasury is the supplier of national debt, while domestic banks, money market funds, pension funds, insurance companies, overseas official institutions, and private investors are the buyers; high deficits and refinancing needs drive continuous bond issuance, with the market absorbing supply through yield and term premiums. Rising interest costs will squeeze discretionary fiscal spending and increase investors' return requirements for long-term bonds; short-term bonds, money market funds, and the treasury brokerage settlement system benefit, while long-duration bonds, growth assets reliant on low-interest financing, and fiscally sensitive sectors face pressure.
Source: Public Information
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The last peak of net interest as a percentage of GDP in the U.S. occurred in 1991 at 3.2%. At that time, a high-interest environment combined with fiscal expansion at the end of the Cold War increased the debt burden, but subsequent economic growth, declining interest rates, fiscal consolidation in the 1990s, and a tech boom expanded the tax base, causing interest as a percentage of GDP to fall. The difference this time is that the debt base is significantly larger: even if rates are lower than the highs of the 1980s, the massive stock of rolling national debt is sufficient to push net interest to record proportions.
The core of the capital path is "repricing old debt." The U.S. Treasury does not finance all debt at current rates in one go, but continues to roll over Treasury bills, notes, and bonds as they mature; past low-coupon bonds are replaced with new bonds at higher coupons, resulting in a lagged increase in interest spending. The $1 trillion net interest in 2026 does not create new public assets like infrastructure, defense, or social welfare, but flows from tax revenues and new debt financing to existing bondholders, including money funds, banks, insurance institutions, pension funds, and overseas reserve managers.
Historical comparisons include U.S. finances after Volcker's tightening in the 1980s: high interest rates once pushed interest spending to around 3% of GDP, but at that time U.S. debt as a percentage of GDP was low, and population, productivity, and tax base expansion provided greater adjustment space. The current CBO projects that net interest as a percentage of GDP will rise from 3.3% to 4.6% from 2026 to 2036, higher than any period in U.S. history; this shifts fiscal policy from disputes over "whether to add new spending" to a constraint phase regarding "whether existing debt consumes policy space."
This represents a shift in pricing power. When the government must continuously sell national debt at higher yields, bond investors participate in defining the discretionary space of the federal budget through term premiums and refinancing rates. The Treasury can delay choices to raise taxes or cut spending, but cannot indefinitely postpone cash payments to debt holders; the larger the interest spending, the more education, infrastructure, defense, and welfare compete not for new fiscal resources, but for the remaining portion after bondholders have prioritized their claims.
ABAB News · Law of Cognition
Debt can be rolled over, but interest is never deferred.
Deficits create national debt, and interest creates the next round of deficits.
When interest consumes the budget, bondholders begin to decide policy.