US government net interest costs rise to 4% of GDP, highest in 10 years

The US federal government is on track to spend roughly $970 billion on interest payments in fiscal year 2025. That’s not building roads, funding schools, or equipping the military. That’s just the cost of servicing existing debt.

Net interest costs have surged to 3.6% of GDP and are projected to hit 4%, a level not seen in a decade. The kicker: corporate America’s interest burden has moved in the exact opposite direction, falling to just 0.4% of GDP.

A tale of two borrowers

The divergence traces back to 2020 and 2021, when the Federal Reserve pinned interest rates near zero in response to the pandemic. Corporate treasurers saw the window and dove through it, locking in historically cheap fixed-rate debt and extending maturities as far as lenders would allow.

The US Treasury, meanwhile, did not meaningfully extend the maturity profile of its debt during the same period. Instead of issuing more long-term bonds at rock-bottom rates, the government continued rolling short-duration securities. When the Fed began its aggressive rate-hiking cycle in 2022, the Treasury found itself refinancing at dramatically higher costs.

Torsten Slok, chief economist at Apollo Global Management, has highlighted this asymmetry as one of the most consequential fiscal dynamics in the current economic landscape. The result is a federal balance sheet increasingly dominated by interest expense, crowding out room for everything else the government needs to fund.

Interest payments now rival defense spending

Federal interest outlays have now surpassed national defense spending, making them the second-largest line item in the federal budget after Social Security. At approximately $970 billion for FY2025, or 3.2% of GDP, these payments are closing in on the trillion-dollar threshold.

Projections for FY2026 suggest they will cross it.

The Congressional Budget Office and Government Accountability Office have both flagged the trajectory as unsustainable under current policies. Their projections indicate net interest costs could escalate to 4.6% of GDP by 2036, assuming no major policy changes. That would represent the highest share of economic output dedicated to debt servicing in modern American fiscal history.

The corporate cushion is temporary

Corporate America’s enviable 0.4% of GDP interest burden won’t last forever either. Companies that locked in low rates during the pandemic will eventually need to refinance. As those maturities come due over the next several years, businesses will face the same dynamic the Treasury is already experiencing: replacing cheap debt with expensive debt.

The difference is timing. Most large corporations structured their refinancing to push maturities out several years, buying themselves a buffer. Many won’t face the brunt of higher rates until 2026 or 2027. The federal government, with its shorter-duration portfolio, hit the wall much sooner.

What this means for markets and fiscal policy

The fiscal implications are significant and extend well beyond the budget itself. Every dollar spent on interest is a dollar unavailable for discretionary spending, fiscal stimulus, or public investment. This creates a structural constraint on the government’s ability to respond to future economic downturns.

For bond markets, the dynamic creates a feedback loop. Higher interest costs mean more borrowing to cover the deficit, which means more Treasury issuance, which can push yields higher, which increases interest costs further. Breaking that cycle requires either significantly higher tax revenue, meaningful spending cuts, or sustained economic growth that shrinks the debt-to-GDP ratio organically.

The sheer volume of Treasury issuance needed to fund these interest payments also raises questions about market absorption capacity, particularly if foreign demand for US government debt continues to soften.

For investors watching this unfold, the corporate-versus-government interest divergence offers a useful lens. Companies that managed their balance sheets prudently during the low-rate era are in a fundamentally different position than the sovereign borrower that didn’t. That gap will narrow as corporate refinancing picks up, but for now, the federal government stands out as the borrower most exposed to the rate environment it helped create through its own fiscal and monetary policy choices.