US government interest payments, tax receipts, average interest rate on the $40 trillion Treasury debt, Debt-to-GDP Ratio, Deficit-to-GDP Ratio…

By Wolf Richter for WOLF STREET.

Interest payments by the federal government on its $40 trillion of Treasury debt rose by $7 billion in Q2 from Q1, to $312 billion. Over the past 12 months, interest payments totaled a record $1.22 trillion, up by 240% since peak financial repression in Q2 2020 (red in the chart).

But interest payments don’t occur in a vacuum. They occur in the context of tax receipts that are available to pay for them.

Tax receipts by the federal government rose by $20 billion in Q2 from Q1, and by $95 billion year-over-year, to a record $952 billion. For the 12-month period, tax receipts jumped by $487 billion (+14.9%) to $3.76 trillion (blue line in the chart below). Tax receipts in Q2 got hit by the refunds of tariffs, which pushed net tariffs into the negative.

The measure of tax receipts, released by the Bureau of Economic Analysis as part of its revised National Accounts data for Q2 on Wednesday, tracks the receipts that are available to pay for general budget expenditures, such as interest payments, defense spending, government salaries, etc.

Excluded are receipts that are not available to pay for general budget expenditures and that are not included in the general budget, primarily Social Security and disability contributions that go into Trust Funds, out of which benefits are paid directly to the beneficiaries. Both the contributions that go into the Trust Funds and the benefits that are paid out of the Trust Funds are off-budget.

Tariffs got hit by refunds that the government paid out after the Supreme Court scuttled part of the tariffs. Refunds started going out in May. Net tariffs collected in Q2 (tariffs minus refunds over those three months) were a negative $3.5 billion, compared to a positive $71 billion in the prior quarter.

New tariffs under a different law are being imposed, so net tariffs should become substantially positive again in the second half of 2026.

The big bite interest payments take out of tax receipts: Interest payments ate up 32.5% of the tax receipts that were available to pay for them in Q2.

The recent high, 37.5%, occurred in Q3 2024, the worst ratio since 1996 when the ratio was climbing down from the crisis times.

In the 1980s and early 1990s, the infamous “bond vigilantes” were breathing down the government’s neck. The phrase was coined by Ed Yardeni at the time to describe bond investors that demanded high yields in light of the risks posed by the government’s fiscal policies and by inflation.

A growing economy generates more taxable income and higher tax receipts from corporate and individual taxpayers, and ballooning asset prices generate capital-gains taxes. But those capital gains tax receipts can plunge in Q1 and Q2 (such as in 2023), following a year when asset prices dropped (such as in 2022). The second half of 2025 and Q1 of 2026 benefited from the new tariffs.

The average interest rate on the Treasury debt was 3.45% in July, 3.41% in June, 3.35% in May, 3.34% in April, 3.33% in March… slowly ticking higher as yields of Treasury bills have risen, and as maturing Treasury notes (2-10 years) and Treasury bonds (30 years) with low interest rates were replaced by new securities with much higher interest rates, and as new bills, notes, and bonds were added to the pile without replacing anything.

The ultra-low interest rates during QE were an aberration in history. Interest rates have been normalizing, but remain low compared to times of high interest rates.

The ugly Treasury-Debt-to-GDP ratio ticked down to 121.5% in Q2, as current-dollar GDP (not adjusted for inflation) rose by 1.9% quarter-to-quarter to $32.5 trillion, while the Treasury debt (also not adjusted for inflation) rose by 1.0% quarter-to-quarter to $39.5 trillion.

So in Q2, the economy grew faster than the debt, and the Debt-to-GDP Ratio dipped a little. That’s part of the concept of controlling the debt fiasco by “letting the economy run hot,” meaning higher inflation and higher nominal economic growth would exceed the growth of the debt and over time bring down the burden of the debt, even as the size of the debt would keep growing.

The Fed seems to be on board with it de facto, despite its verbiage to the contrary: It cut rates with inflation still high in the fall of 2024 and it cut rates again with inflation high and accelerating in the fall of 2025.

Given that Congress will not address the deficit, doesn’t even care about the deficit, and if anything, keeps talking about making the deficit worse through additional spending (the war in Iran) and additional tax cuts, well then, higher inflation and higher nominal economic growth may be the only solution in sight for Bessent and Warsh.

The bond market, however, is not enamored with these policies.

Beyond the quarter-to-quarter squiggles though, the trend is still higher. During the lockdown in Q2 2020, GDP collapsed while the debt exploded, and the ratio spiked to the moon. GDP then bounced off, while the growth of the debt slowed from the explosive pace to a still very fast pace, and the ratio backed off through 2022. This phase is not indicative of a trend. The new trend starts in 2022.

The recklessness in Congress is the driving force behind this ugly mess. The drunken sailors in Washington have been throwing money willy-nilly left and right while cutting taxes. In the four years of fiscal 2022 through 2025, the deficit hovered relentlessly at around 6% of GDP, despite above-average economic growth. For fiscal 2026, the Congressional Budget Office projects it to be in the same dismal range.

In case you missed it: Inflation Exacts its Pound of Flesh: How Americans Earned their Income from All Sources except Capital Gains

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