U.S. debt interest payments hit a record high, intensifying fiscal deficit challenges.

For the first time, U.S. interest payments on debt have exceeded defense spending, accounting for 18% of federal revenue and reaching a 28-year high. In fiscal year 2024, the federal government's budget deficit reached $1.833 trillion, with net interest payments on debt totaling $882 billion, equivalent to 3.06% of GDP.

The main drivers of the rising deficit include increased spending on Social Security and Medicare, massive expenditures during the pandemic, and the 2017 tax reform. High interest rates have exacerbated fiscal pressures, with the Federal Reserve maintaining interest rates at a two-decade high.

The substantial interest payments could crowd out private investment and hinder economic growth. The Congressional Budget Office estimates that for every dollar of deficit-financed spending, private investment decreases by 33 cents.

With the election looming, the budget deficit has become a challenge for presidential candidates. Economic policies of Harris and Trump could lead to rising prices and an expanded deficit. The Committee for a Responsible Federal Budget predicts that Harris's plan would increase debt by $3.5 trillion, while Trump's plan would increase it to $7.5 trillion.

A Federal Reserve rate cut could alleviate the debt problem, but it will take time. Over the next few years, as low-interest government bonds mature, repayment costs will rise. The aging population will also increase, leading to higher costs for Social Security and Medicare, and the budget deficit will remain substantial.

Investors are not currently overly concerned about the U.S. fiscal challenges, but the situation has changed. With rising interest rates, debt interest payments have significantly increased, and the era of "free lunch" is over.