
Interest costs are not exploding. To be sure, inflation remains elevated, which pushes up short-term interest rates. But, because the US Treasury issues long-term bonds, debt-servicing costs depend on long-term rates, which have risen by less. Currently, the interest rate on ten-year government bonds is 3.6%, while the CBO’s inflation forecast for that horizon is 2.4%, so the real (inflation-adjusted) interest rate relevant for calculating the interest burden is still only 1.2%. What matters is the difference between the real interest rate and the growth rate of the economy. If the real interest rate is lower than the growth rate of inflation-adjusted GDP, then the debt ratio can fall even when the government runs budget deficits. The CBO’s forecast for growth over the next ten years is 1.7% – higher than the real interest rate. This is not a license to engage in unlimited spending. But it implies that, given a debt-to-GDP ratio of 100%, the federal government can run deficits of 0.5% of GDP (the difference between 1.7% and 1.2%) over and above its interest payments without causing the debt ratio to rise.