Core Insights:

• US debt servicing payments have doubled from 1.5% of GDP in 2021 to 3.4% of GDP in 2024, and now exceed the entire defense budget.
• The CBO projects US debt-to-GDP to hit 166% by 2054.
• An unstable medium-term fiscal outlook leaves the United States increasingly vulnerable to speculation in debt markets.
  
• Future austerity measures could reduce US capacity to project military power globally. 

Summary

The Congressional Budget Office (CBO) – the nominally non-partisan and impartial ‘umpire’ of US fiscal policy – released its latest long-term projections in March. The numbers convey what is essentially an open secret in Washington, that US finances are on a wholly unsustainable track. Yet the extent of the fiscal pressures, which stem from rapid growth in interest payments and mandatory spending, and the immediacy with which they will begin to be felt make for some sobering reading. Simply put, the problem of tomorrow is gradually transitioning into the crisis of today, and this will resonate in onerous fiscal constraints in US politics in the coming years, with variables like interest rates and economic growth amplifying or easing the pain. At best, the nature of US politics will change; at worst, a crisis of faith will shake the foundations of global finance, toppling the pillars of the post-Cold War global order.

Background

US Interest Payments Set to Spike

What a difference 15 years can make. In 2008, US public debt stood at 39% of GDP. Now that number is hovering around 100%, buoyed by the combined fiscal impacts of the Great Recession and the COVID-19 pandemic. The CBO’s long-term estimates from 2024 onward point the way to ever-greater heights, with the debt projected to hit 166% of GDP by 2054. Debt growth will be fueled by ballooning overall deficits, despite primary deficits (pre-interest spending) expected to remain either unchanged or smaller relative to GDP over time. In other words, deficits are on a destabilizing track regardless of how the discretionary budget is handled, driven by a ‘locked-in’ expansion in mandatory spending and debt servicing costs.

The included charts illustrate that the US government has been spending beyond its means and, barring a major course-correction, will soon face unprecedented fiscal pressure from ballooning interest payments. Such payments have already doubled in just a few years, jumping from 1.5% of GDP in 2021 to 3.1% in 2024. In absolute terms, going by the CBO’s 2024 GDP numbers, this translates into an additional $426 billion in annual outlays. The current fiscal year thus marks a turning point where the cost of debt servicing actually might exceed the entire defense budget of the United States. And it only gets worse from here: by 2034, the US government will be paying $1.6 trillion annually in interest, and interest payments will account for 64% of the deficit. And by 2050, annual interest payments will reach $4.2 trillion according to the CBO’s economic baselines.

This dire fiscal outlook ensures that future governments will be forced to borrow to cover previous debt obligations. Not only is this economically wasteful since no new productive capacity is being created, but it involves considerable fiscal risk, especially given the extent of the public debt. The overriding takeaway is that US fiscal stability will become inexorably tied to the functioning and goodwill of debt markets. Interest rate fluctuations in particular will reverberate in hundreds of billions worth of payments added or subtracted.