Why rising federal debt should worry Minnesotans

While Minnesota’s fiscal condition is looking good — at least in the short run— as tax revenues blow past projections ‚ the same cannot be said about the federal government.

According to the Treasury Department, as of September 13, total U.S. debt reached $35.27 trillion — 80 percent of that held by the public. Total debt is up $1.28 trillion from the beginning of this year.

Figure 1: US Federal Government Debt (in Trillion $)

Worse yet, due to this tremendous level of debt, interest payments are high and rising. In the 2024 fiscal year, the federal government paid over $1 trillion in interest. This is more than what the federal government spent on programs such as Medicaid as well as Defense. CBO estimates that the U.S. will pay about $13 trillion in interest in the next decade.

Why this is a problem

Certainly, growing federal debt should be a concern for every resident in the country. However, some states have it worse than others. And Minnesota is one of those states.

Specifically, over the years, Minnesota has dedicated a bigger and growing share of its budget to welfare programs — such as Medicaid — which are overly reliant on federal grants and matching funds. This has made Minnesota more reliant on federal funds than in the past.

As the American Experiment illustrated in a recent report, while Health and Human Services (HHS) — the majority of which goes to Medicaid —  spending made up 23 percent of General fund spending in 2000, that share reached 29 percent in the 2023 fiscal year. In the 2026-27 biennium, HHS spending will reach 35 percent of the general fund budget. As a share of all spending, HHS has gone from 31 percent in 2000 to 46 percent in 2023.

This is problematic, and here’s why.

Currently, more than half of all Minnesota HHS spending comes from the federal government‚ through either Medicaid matching funds or grants for other welfare programs.

Rising debt and interest payments, however, raise the likelihood that the federal government could have to enact austerity measures. Among other things, this would include reducing funding to the states, for programs such as Medicaid. And if such reductions occurred, Minnesota would have to shoulder billions of additional dollars. That would put massive pressure on state resources.

In 2019, for example, the federal government’s share of Minnesota’s Medicaid spending was 56 percent, according to NASBO. If the federal government’s share of spending was reduced even to 50 percent, Minnesota would have had to spend an additional $785 million in state funds to maintain the program. And if the federal government’s share was lowered to 40 percent, Minnesota would have had to spend over $2 billion to maintain a similar level of service

Minnesotans should be particularly concerned

While high and rising federal debt is bad news for the whole country, Minnesotans ought to be particularly concerned. Reckless spending in the 2023 legislative session has put the Minnesota budget in a more precarious position. Ergo, potential federal spending changes aimed at tackling debt are likely going to have a bigger impact here than in other states.