In the just-ended fiscal year, the interest cost of US debt has risen to the highest level since the 1990s, which further increases the risk of fiscal concerns restricting the policy options of the next Washington government.

Data released by the US Treasury Department last Friday shows that in the fiscal year ending in September, the Treasury spent $882 billion on net interest expenditures - an average of approximately $2.4 billion per day. This expense is equivalent to 3.06% of the Gross Domestic Product (GDP), the highest proportion since 1996.

The historically high budget deficits in the United States have led to a surge in the total outstanding debt in recent years, which is an important reason for the increase in interest payments. These deficits reflect steady growth in spending on Social Security and Medicare, as well as extraordinary spending released to combat the new crown epidemic and the income constraints of the comprehensive tax cuts policy in 2017. Another major driving factor is the surge in interest rates caused by inflation.

Wendy Edelberg, Director of the Hamilton Project at the Brookings Institution, said, 'The higher the interest cost, the more prominent these issues are politically. This makes it more likely for politicians to realize that borrowing to fund our priority expenditures is not without cost.'

Although former President Trump and Vice President Harris did not make deficit reduction a core part of their election campaigns, the debt issue still looms over the next government. Due to severe partisan divisions in the US Congress, only a few or possibly just one cautious member on the deficit issue can block tax and spending plans.

This situation has already occurred in the outgoing Biden administration, when Democratic Senator Joe Manchin forced the White House to reduce its favored spending items as a cost for passing landmark legislation in 2021 and 2022.

Even if the Republicans control both houses of Congress and Trump takes office, the majority party's advantage may diminish, allowing fiscally conservative Republicans to demand modifications to the comprehensive tax reduction policy.

Edelberg, former chief economist of the Congressional Budget Office (CBO) in the United States, said: "It would be astonishing if the outcome of next year's tax debate is a large group of policymakers examining our debt trajectory and deciding to make it worse."

According to data from the Department of the Treasury and the CBO, net interest payments have exceeded spending by the Defense Department on military projects for the first time. In addition, net interest payments account for about 18% of federal income, nearly double what it was two years ago.

The Federal Reserve's decision to lower interest rates has provided some relief to the Department of the Treasury. As of the end of September, the weighted average interest rate on outstanding U.S. debt was 3.32%, marking the first monthly decline in nearly three years.

Nevertheless, the size of interest costs is still so large that it itself adds to the overall debt burden of the public, which currently stands at $27.7 trillion, close to 100% of GDP. Debt servicing was one of the fastest-growing parts of last year's budget. Interest payments may also crowd out private investment, thereby affecting economic growth.

The non-partisan CBO estimates that for every additional $1 in deficit-financed spending, private investment decreases by 33 cents.

Shai Akabas, Director of Economic Policy at the Bipartisan Policy Center, said: "From various perspectives, the rising interest costs due to debt and the resulting economic consequences are a problem for our economy."

Treasury Secretary Yellen downplayed people's concerns. She said that a key indicator of evaluating the sustainability of U.S. finances is the ratio of interest payments adjusted for inflation to GDP. This ratio has increased over the past year, but the White House believes it will stabilize at around 1.3% over the next decade. Yellen has stated that staying below 2% is important, with some seeing this level as a critical threshold for sustainability.

However, the White House's forecast assumes that income-increasing measures proposed by the outgoing Biden administration will be approved. Harris also calls for increased taxes on the wealthiest Americans and corporations. Trump, on the other hand, argues that the key to addressing the fiscal outlook is further tax cuts, believing this will promote economic growth and offset impacts on the government's bottom line.

Most economists believe that regardless of which candidate wins, debt will continue to rise. The responsible Federal Budget Committee estimates that Harris' economic plan will increase debt by $3.5 trillion over ten years, while Trump's plan will cause debt to soar by $7.5 trillion.

In addition to the election results, the extent of the Federal Reserve's interest rate cuts will also impact the fiscal outlook. After policymakers raised interest rates in March 2022, the Treasury Department's interest bills quickly reflected the extent of the rate hikes, while rate cuts may take more time to lower the government's borrowing costs.

This is partly due to the fact that a portion of the U.S. debt maturing in the coming years has very low interest rates, which existed even before the Fed's tightening cycle. Many securities will be redeemed with higher-cost U.S. Treasuries.

The situation in the coming years may also be so – especially if the Fed stops cutting rates when rates are still higher than pre-COVID levels. Over the decade until 2019, the Fed's short-term benchmark interest rate averaged less than 0.75%, and policymakers forecasted the rate to stabilize around 2.9% in September.

Meanwhile, with the aging of the U.S. population, costs related to Social Security and Medicare will continue to rise, potentially causing significant budget deficits in the coming decades unless reforms are made.

This pressure, combined with politicians' aversion to changing popular programs, is putting pressure on the rest of federal spending (discretionary spending).

Apollo Global Management's Chief Economist Torsten Slok's analysis shows that in the 1960s, discretionary spending accounted for about 70% of total federal spending, whereas now this ratio is only 30%.

Currently, due to the Fed's loose policy cycle and concerns about a soft job market continuing to support demand for Treasuries, investors show little concern about America's fiscal challenges. Wells Fargo Investment Research Institute's global strategist Gary Schlossberg said, but if this changes, it could have a decisive impact on Washington.

"The situation has changed," Schlossberg said. "Previously, we had more freedom - interest rates were very low. You could operate with debt, interest expenses were not high, but now it's obviously different."

Editor/Rocky