The federal government paid $970 billion in net interest on its debt in fiscal year 2025 — nearly triple what it paid just four years earlier. At the same moment, the share of Americans participating in the workforce has slipped to 62.0%, its lowest level in years, constraining the very tax base that funds those payments. Together, these two data streams tell the story of a fiscal squeeze that is becoming harder to grow out of.
This is not a story about the deficit in the abstract. It is about the collision of two structural forces: an interest cost curve that is rising at 10 times the pace of payroll growth, and a labor market that has lost roughly 3.4 million workers relative to pre-pandemic participation rates. When the revenue side of the ledger stagnates while the fastest-growing spending category is non-discretionary, the math of federal finance becomes unforgiving.
The Interest Cost Explosion
Federal net interest payments reached $970.4 billion in FY2025, up $89.3 billion — or 10.1% — from the $881.0 billion recorded in FY2024. The trajectory is stark: in FY2021, the same figure stood at $352 billion. In four years, interest costs have nearly tripled.
The arithmetic is straightforward. Total public debt now stands at $38.99 trillion as of March 26, 2026, with $31.36 trillion held by the public and $7.63 trillion in intragovernmental holdings. The average interest rate on total federal debt now sits at 3.320% — with Treasury bills yielding 3.720% and bonds at 3.377%.
The refinancing risk embedded in this structure is underappreciated. An enormous share of Treasuries issued during the near-zero rate era of 2020–2021 are maturing now and being rolled over at rates two to three times higher. Every $1 trillion in additional debt refinanced at today's 3.32% average adds approximately $33 billion in annual interest — roughly the entire annual budget of the Environmental Protection Agency. And because this refinancing is mandatory and non-discretionary, Congress has no lever to simply decline it.
Federal interest payments grew by $89 billion in FY2025 — faster than total nonfarm payrolls grew in dollar terms.
— FRED Series FYOINT / BLS PAYEMS, GTP Analysis
For context: in FY2021, net interest represented roughly 8.5% of total federal outlays. By FY2025, that share has risen to an estimated 14–16%. The Congressional Budget Office has long projected that net interest would surpass defense spending by around FY2026 — that threshold has now been crossed.
The Workforce Constraint
The labor force participation rate — the share of working-age Americans who are either employed or actively seeking work — fell to 62.0% in February 2026, according to FRED Series CIVPART (BLS). That is down 0.1 percentage point from January and 0.64% year-over-year. Before the pandemic, in February 2020, the rate stood at 63.3%.
The gap between those two figures represents roughly 3.4 million workers who have not returned to the labor force — people who are not employed and not looking. Their absence has real fiscal consequences: fewer workers means less payroll tax revenue, less income tax revenue, and more pressure on entitlement programs. Total nonfarm payrolls, at 158.47 million as of February 2026, grew just 0.02% year-over-year — the weakest annual payroll growth pace in years.
| Metric | Value | YoY Change |
|---|---|---|
| Net Interest (FY2025) | $970.4B | +10.1% |
| Total Nonfarm Payrolls | 158.47M | +0.02% |
| Labor Force Participation | 62.0% | −0.64% |
| Avg. Hourly Earnings (YoY) | $37.32/hr | +0.81% |
| Debt-to-GDP (Q4 2025) | 122.5% | +1.2 pp |
The participation gap matters for a second reason: wage growth is not compensating for it. Average hourly earnings rose just 0.81% year-over-year in February 2026 — barely above the current CPI pace. With real wage gains close to zero and fewer people working, the aggregate tax base is effectively flat. Yet the interest bill on the national debt is compounding at 10% annually.
The Squeeze: When Revenue Stagnates and Costs Don't
The federal deficit stood at -5.77% of GDP in FY2025, according to FRED Series FYFSGDA188S — a marginal improvement from -6.20% in FY2024, but still among the largest peacetime deficits in American history. Federal debt as a percentage of GDP reached 122.5% in Q4 2025, up from 121.0% in Q3 and from 106.8% at the start of the pandemic.
These headline numbers obscure the structural problem. At a deficit of -5.77% of GDP in a period of nominal economic growth, the government is not just borrowing for investment — it is borrowing to pay its bills. Net interest alone now accounts for a meaningful fraction of that deficit. If the LFPR recovered from 62.0% to the 2019 average of 63.2%, it would represent approximately 2.6 million additional workers — and meaningfully more income and payroll tax revenue. But structural labor force exits driven by aging demographics are not quickly reversed.
The unemployment rate of 4.4% in February 2026 does not fully capture the strain. The broader U-6 rate — which includes marginally attached workers and those in part-time jobs for economic reasons — sat at 7.9%. The Sahm Rule recession indicator, at 0.27, remains below the 0.50 threshold that has historically signaled recession, but its elevation above recent lows suggests labor market momentum is fading, not building.
What the Data Doesn't Tell Us
There is a scenario in which this squeeze self-corrects: if the Federal Reserve continues normalizing rates and the average rate on federal debt stabilizes or declines, interest cost growth would slow. If labor force participation recovered — driven by immigration, workforce re-entry, or delayed retirement — the tax base would expand. Neither of these scenarios is foreclosed.
But the data available today points in the other direction. Labor force participation has been declining for two decades, interrupted only briefly during the COVID recovery. The rate at which maturing Treasury debt is being rolled over at higher costs is a mechanical process that will continue for years. And initial jobless claims, at 210,000 for the week of March 21, 2026 — up 3.45% year-over-year — suggest the labor market is losing some of its post-pandemic resilience.
What the data tells us clearly is this: the federal government is now in a structural fiscal position where the fastest-growing item in the budget is the cost of money it has already borrowed, and the workforce that generates the revenue to service that debt is not growing to match. That is the arithmetic of the fiscal squeeze — and it does not resolve itself without deliberate policy choices that, as of this writing, remain absent from the congressional agenda.
Net interest (FYOINT): FRED Series FYOINT represents net interest payments as reported by the Bureau of Economic Analysis / OMB, measured on a fiscal year basis ending September 30. The FY2025 value of $970,359 million reflects final fiscal year data.
Labor Force Participation (CIVPART): BLS measure of the civilian noninstitutional population age 16+ who are employed or actively seeking work, expressed as a percentage of total civilian noninstitutional population. Distinct from the unemployment rate, which measures only those actively seeking work as a share of the labor force.
Deficit as % of GDP (FYFSGDA188S): Fiscal year basis. The -5.77% figure for FY2025 is a calendar year approximation using FRED annual series data.
Debt-to-GDP (GFDEGDQ188S): Quarterly data; Q4 2025 represents October 2025 observation, latest available at time of publication.
All data sourced from FRED (Federal Reserve Bank of St. Louis), BLS, and U.S. Treasury Fiscal Data — all official U.S. government sources.