The federal government is facing unprecedented fiscal challenges. Yet it borrows extensively as tax revenue is not sufficient to cover its yearly costs, resulting in an ongoing annual budget deficit. House Republicans recently passed legislation that raises about $4 trillion in tax cuts. These cuts overwhelmingly help the richest households and would further erode the country’s fiscal situation. As a result, economists are sounding the alarm that absent some course correction the national debt will increase dramatically, putting even more pressure on the U.S. economy.
Yet the status quo trajectory shows a disastrous increase in the debt-to-GDP ratio. It will jump from about 101% at the end of 2025 to a mind-boggling 148% by 2034 if the as-introduced House bill becomes law. This steep increase indicates that the country’s economy may have great difficulty outpacing its growing debt load. This trend poses a significant threat to long-term fiscal sustainability. The impact of this legislation is more than just math — it could lead to serious long-term impacts on consumers and the economy as a whole.
The bond market is now signaling its response to these dramatic fiscal developments. Experts argue that it is “sounding the alarm” on the deteriorating financial condition of not only the U.S., but the world. Interest rates for consumer financing have already doubled in recent years, making borrowing more expensive for individuals seeking loans for homes, cars, and other major purchases. The effective yield on 10-year Treasury bonds jumped from roughly 2.1% during the years from 2012 to 2022 to approximately 4.1% in 2023. This sudden spike underscores deepening investor fears about the government’s increasing debt load.
Indeed, some analysts are forecasting that the 10-year Treasury yield will spike by at least 0.6 percentage points. This reversal can occur even when the debt-to-GDP ratio increases from 100% to 130%. Such a change would hit consumers immediately, raising the price of financing normal purchases. A typical 30-year mortgage rate can increase from just under 7% to slightly over 7.6%. This recent spike has worsened the affordability crisis for first-time buyers, who desperately need lower prices and interest rates to buy a home.
The financial implications of holding U.S. debt are coming into focus. Interest payments on the national debt have now surpassed national defense spending, thus becoming the second-largest expenditure of the federal government, behind Social Security. It’s hard to overstate what this trend represents – a dramatic shift in fiscal priorities. Today, more federal resources are dedicated to servicing debt than funding our critical services and investments.
Republicans may choose to not pass additional legislation. Even on these projections the debt-to-GDP ratio is still set to rise to 138%. This unfortunate scenario reflects the critical need for dangerous policymakers to get their act together. The growing debt burden imperils future fiscal health as well as the bedrock underpinnings of our long-term economic growth.
Just last week, economists echoed that warning, saying the U.S. debt burden will continue to increase indefinitely without serious changes. As a consequence, consumers will spend billions more in financing the purchases of consumer goods. As interest rates go up, consumers are going to start to feel the pinch on their pocketbooks. This new reality will severely constrain their ability to produce major financial commitments.