December 14, 2010 / 11:16 PM / 9 years ago

CBO sees U.S. interest payments ballooning

*Rising interest rates to push U.S. debt costs higher

*CBO sees U.S. interest payment ballooning by 2020

WASHINGTON, Dec 14 (Reuters) - Interest payments on the U.S. debt could balloon to $800 billion a year, or 3.4 percent of the economy, by 2020 under current spending and tax laws, a congressional budget analysis released on Tuesday said.

The report by the non-partisan Congressional Budget Office said that U.S. debt held by investors, which currently stands at $9.3 trillion, will exceed $16 trillion by the end of the decade under current law. Rising interest rates means federal spending to service the debt will rise from $197 billion, about 1.4 percent of gross domestic product, in 2010, to at least $800 billion by the end of the decade.

Debt and interest costs will rise even higher if Bush-era tax cuts and current levels of spending continue unchallenged, the CBO warned.

“If, for example, the tax reductions enacted earlier in the decade were continued, the alternative minimum tax was indexed for inflation, and future annual appropriations remained the same share of GDP that they were in 2010, debt held by the public would total nearly 100 percent of GDP by 2020,” the CBO said. “Interest costs would be correspondingly higher.”

Public debt currently amounts to about 62 percent of the economy. Many budget analysts believe a public debt level higher than that could lead to the same kind of economic turmoil recently seen in Greece and other European countries.

Current law calls for tax cuts enacted under President George W. Bush to expire at the end of this month. But Congress is expected in the next few days to pass a bill extending the low tax rates through 2011. The bill reflects an agreement between President Barack Obama and congressional Republicans.

The CBO report will help guide lawmakers over the next few months as they push to control government spending and act on raising the $14.3 trillion statutory debt limit, which includes money borrowed from Social Security and other government trust funds as well as from investors. The statutory debt now stands at $13.8 trillion. (Reporting by Donna Smith; Editing Leslie Adler)

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