U.S. Debt Set for Dead Reckoning If Government Won’t Curb the Deficit

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As of May 5, 2025, U.S. debt officially crossed $36.2 trillion and is rising at a pace that could break the federal debt-to-GDP record of 119 percent set in 1945. The Congressional Budget Office projects the threshold will be surpassed by 2032. If the Republican-backed tax and spending bill becomes law, the record could fall as early as 2029. Unlike past debt surges driven by war or recession, today’s rise is fueled by structural deficits and partisan spending proposals. Projections show the imbalance between tax revenue and federal outlays will continue, further widening the gap and increasing interest costs that already outpace defense spending.

Interest Payments Now Outpace Defense Spending

The federal government now spends more on interest than on the military. Rising rates have compounded the effect, locking in higher long-term borrowing costs. Moody’s responded by downgrading U.S. credit from Aaa to Aa1, citing the widening fiscal gap and lack of corrective policy. While Treasury Secretary Scott Bessent dismissed the downgrade as symbolic, market analysts saw it as a turning point. Bond volatility increased. Yields rose. And investor demand for longer-term Treasuries has begun to shift, signaling rising discomfort with fiscal direction.

The Trump administration maintains that economic growth will counterbalance the debt. Its bill extends the 2017 tax cuts, introduces new exemptions, and projects GDP growth between 3.3 and 3.8 percent in the short term. Officials argue that increasing output will realign the debt ratio without requiring tax hikes.

However, the CBO rejects that forecast. Their latest projection shows debt reaching 220 percent of GDP by 2055 if the tax cuts are extended without offsetting revenue. Analysts at the Committee for a Responsible Federal Budget add that even a partial extension of the bill’s provisions will push debt above 125 percent of GDP by 2034.

Global Creditors and Institutional Pressure

The International Monetary Fund is urging the U.S. to curb its deficit before global markets lose confidence. IMF deputy director Gita Gopinath warned that fiscal conditions must improve or the U.S. risks undermining its long-term credibility. Foreign holders of U.S. debt, including Japan and China, have already reduced their positions.

Currently, foreign governments and institutions hold approximately 25 percent of U.S. debt. Japanese and Chinese officials have suggested that their holdings may be used in trade negotiations, introducing geopolitical uncertainty into debt management. Reduced foreign demand would increase borrowing costs even further.

Major banks are warning that investors need to see signs of restraint. Deutsche Bank described the current trend as fiscal erosion by accumulation. UBS said the downgrade may not cause immediate disruption but noted the Federal Reserve would likely intervene if volatility spikes.

Economists warn that inaction will crowd out future options. Interest payments are set to consume an increasing share of the federal budget. In the absence of a debt ceiling mechanism or fiscal trigger, the pressure will fall back on markets to enforce discipline.

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