In 2026, interest costs on the national debt will reach $1 trillion — a historic, but unfortunate, milestone. Now the fastest-growing category in the federal budget, interest payments surpass spending on national defense or Medicare, and they are on pace to eventually become the single largest “program” in the federal budget.

Growing interest costs matter because of their effect both inside the federal budget as well as on the overall economy. In a recent memo, Third Way describes three ways the rise in interest spending crowds out public investments and deters private investment in the economy.
The memo highlights how rising interest costs lead to:

1. Diminished investment in future generations. As interest payments drive up overall spending, there are fewer resources available to invest in long-term programs such as infrastructure, research, or education. As a result, today’s taxpayers pay for yesterday’s borrowing rather than for investments in their future.
2. Less support for children and families. Interest payments far exceed federal spending on children through programs such as Medicaid, SNAP, and the Child Tax Credit. By 2034, interest costs will comprise 17 percent of the federal budget, while spending on children will decrease to 6 percent of the budget.
3. Decreased private-sector growth. The rising national debt adds upward pressure on interest rates, which raises the price of borrowing and deters private investment. Reduced private investment can lead to lower productivity and ultimately slow economic growth.

The Third Way paper draws attention to how Americans may feel squeezed from multiple perspectives as the interest costs on our high and rising debt crowd out investments across the federal budget and the economy. America’s fiscal trajectory is on an unsustainable path, and lawmakers should pursue responsible solutions to address the growing interest burden and get our fiscal outlook on a sustainable path.