Examining the Consequences of a High and Rising National Debt

The United States’ fiscal outlook is unsustainable: federal debt held by the public is about 100% of GDP (roughly $30 trillion at end-FY2025) and the CBO projects it will rise to 119% of GDP by FY2035 ($52.1 trillion) and 156% by FY2055 ($138.2 trillion), with annual deficits growing from $1.8 trillion (5.9% of GDP) in FY2025 to an estimated $6.4 trillion (7.3% of GDP) by FY2055. Rising debt already drives higher interest costs—net interest was about $1.0 trillion in FY2025 and is projected to climb to $1.8 trillion by FY2035 and $4.8 trillion by FY2055, consuming an ever-larger share of revenue—and, through crowding out and risk premia, threatens to push up market interest rates, slow private investment and income growth, reduce fiscal space for future crises, and shift burdens to younger generations. Given persistent policy choices favoring unpaid-for tax cuts and spending, the report highlights heightened downside risks for growth, structural upward pressure on yields, tighter fiscal headroom for policymakers, and an elevated—but hard-to-quantify—risk of a fiscal shock that would have material implications for asset prices and capital allocation.

Analysis

The report documents an unsustainable U.S. fiscal trajectory: federal debt held by the public equaled about 100 percent of GDP (~$30.3 trillion) at end-FY2025 and the CBO projects it will rise to 119 percent of GDP ($52.1 trillion) by FY2035 and to 156 percent ($138.2 trillion) by FY2055, while annual deficits widen from $1.8 trillion (5.9% of GDP) in FY2025 to an estimated $6.4 trillion (7.3% of GDP) by FY2055. Net interest expense already reached roughly $1.0 trillion in FY2025 (about 20% of federal revenue) and is projected to grow to $1.8 trillion by FY2035, $2.9 trillion by FY2045 and $4.8 trillion by FY2055, outpacing revenue growth and crowding out other budget priorities.

The report quantifies economic consequences: under CBO’s baseline crowding-out assumption private investment reduces by $0.33 per dollar of borrowing, trimming projected per-capita income growth through 2055 (baseline per-capita GNP rises to $131,800 vs $139,900 with no crowd out), and a stronger crowd-out scenario would materially depress long-term income and investment. Rising supply of Treasuries and potential risk premia place upward pressure on market yields, which transmits to mortgages, corporate borrowing costs and investment decisions.

Fiscal space is narrowing materially — illustrative room before matching the postwar record falls from 71 percentage points of GDP at the Great Recession to just 6 points today and is projected to disappear by FY2029 — increasing vulnerability to future recessions or fiscal shocks and shifting burdens to future generations while leaving an elevated but hard-to-quantify risk of a fiscal crisis.

Key Decisions for Investors

• Shorten portfolio duration and underweight long-dated Treasuries and rate-sensitive sectors (REITs, utilities) given projected upward pressure on yields
• Increase allocations to floating-rate instruments, short-dated TIPS and high-quality cash equivalents to hedge higher rates and potential inflation risk
• Monitor fiscal-policy developments and CBO debt-to-GDP milestones (notably FY2028–FY2029) and stress-test portfolios for slower growth and higher-rate scenarios
• Maintain a high-quality bias in credit exposure but prepare to deploy capital into dislocations if fiscal stress triggers market selloffs