The US has had the largest defense budget in the world for a long time, and this year's spending will be close to 900 billion US dollars.

However, this expenditure is quickly being overtaken by the fastest-growing portion of the federal budget — interest payments on treasury bonds.

In the first seven months of fiscal year 2024, which began in October of last year, total net interest payments on US Treasury bonds reached 514 billion US dollars, 20 billion US dollars higher than defense spending during the same period. Budget analysts believe this trend will continue, making fiscal year 2024 the first time in US history that interest spending on treasury bonds surpassed defense spending.

Just two years ago, interest expenses were the seventh-largest expenditure category in the US federal budget, behind social security, health programs other than health insurance, income assistance, defense, health insurance, and education expenses.

Interest expenses are now the third-largest expense after social security and health care. This isn't because any other project is shrinking. Although most government spending is growing moderately each year, interest expenses in FY2024 will be 41% higher than in FY2023.

There are two obvious reasons for the expansion of interest expenses.

First, the annual deficit surged, causing the total US federal debt to reach 34.6 trillion US dollars, which is 156% higher than the size of treasury bonds at the end of 2010.

In the 90s of the last century, the average annual federal deficit was $138 billion. In the 2000s, that figure was $318 billion. In the 2010s, that figure was $829 billion. Since 2020, the annual deficit has swelled to $2.24 trillion, mainly due to pandemic-related stimulus measures in 2020 and 2021. The 2024 budget gap is $1.5 trillion.

The annual deficit as a percentage of GDP has almost doubled in just 10 years, from 2.8% in 2014 to a forecast of 5.3% in 2024. As a result, there are more loans that need to be paid interest.

As interest rates have soared over the past two years, the government's borrowing costs have also risen. Like consumers who buy homes and cars, the US government benefits from cheap money when interest rates are low, and bears a heavier burden when interest rates are high.

From 2010 to 2021, the average interest rate on all US Treasury bonds sold to the public was only 2.1%, which helped keep total interest payments within a manageable range.

But in 2022, the Federal Reserve began raising interest rates to curb inflation, and now the average interest rate paid by the government is 3.3%. As a result, the amount of borrowing continues to rise, and so does the cost of borrowing.

More taxpayers' money is being spent on interest expenses, and ultimately less money spent on other areas. At some point, the US Treasury will no longer be able to solve the problem through borrowing.

This is an unsustainable situation that could cause investors to lose confidence in the government's credibility and demand higher interest rates to buy US Treasury bonds.