In January 2025, the Congressional Budget Office (CBO) released its "Budget and Economic Outlook: 2025 to 2035," projecting that U.S. federal debt held by the public will rise from 100% of Gross Domestic Product (GDP) in 2025 to 118% by 2035. This increase is driven by escalating mandatory spending and net interest costs, which are expected to reach 4.1% of GDP by 2035. These projections indicate significant fiscal challenges ahead, with debt levels surpassing historical records and interest payments consuming a growing portion of federal revenues.

Deficit Projections

The federal budget deficit is projected to be $1.9 trillion in 2025, equating to 6.2% of GDP. By 2035, the deficit is expected to grow to $2.7 trillion, or 6.1% of GDP. These figures highlight a persistent gap between federal revenues and expenditures over the next decade.

Debt Levels

Federal debt held by the public is anticipated to increase from 100% of GDP in 2025 to 118% by 2035, surpassing the previous high of 106% recorded in 1946. This trajectory reflects the cumulative effect of annual deficits and underscores the growing fiscal burden on the economy.

Spending and Revenues

Federal outlays are projected to rise from $7.0 trillion (23.3% of GDP) in 2025 to $10.7 trillion (24.4% of GDP) in 2035. Revenues are expected to grow from $5.2 trillion (17.1% of GDP) in 2025 to $8.0 trillion (18.3% of GDP) in 2035. Despite revenue growth, spending is projected to outpace revenues, contributing to the increasing deficit.

Interest Costs

Net interest payments on the debt are projected to increase from $952 billion (3.2% of GDP) in 2025 to $1.8 trillion (4.1% of GDP) by 2035. This rise in interest costs reflects both the growing debt levels and anticipated increases in interest rates over the period.

Historical Context

The projected debt levels are unprecedented, with the previous record being 106% of GDP in 1946, following World War II. The current projections indicate a significant departure from historical averages, reflecting escalating fiscal challenges.

Social and Economic Implications

As net interest payments grow, they are projected to surpass spending on major programs such as Medicare and defense. By 2025, interest costs are expected to exceed defense spending, and by 2035, they are projected to be higher than Medicare outlays. The rising debt-to-GDP ratio and increasing interest payments raise concerns about the long-term sustainability of federal fiscal policies. Elevated debt levels can lead to higher borrowing costs and may crowd out private investment, potentially hindering economic growth.

Policy Considerations

Addressing the rising debt will require a combination of policy measures, including spending cuts, tax reforms, or both. Policymakers will need to carefully consider the economic impacts of these measures to ensure fiscal sustainability while promoting economic growth.

International Perspective

Comparing the U.S. fiscal outlook with that of other developed nations facing similar challenges, such as Japan, can provide valuable insights. Japan has initiated a reassessment of its debt profile strategy due to a sudden decline in demand for long-dated government bonds, signaling potential action by the U.S. to follow suit. Japan, which holds the second-longest average debt maturity among G7 nations, is shifting focus toward issuing short-term debt due to rising yields on long-term bonds. Similarly, the U.S. faces mounting fiscal pressures, including increased public debt projected to rise to 118.5% of GDP by 2035, surging net interest payments, and the financial implications of recent tax cuts.

Despite having the shortest weighted average maturity among G7 countries, recent trends show declining appetite for U.S. long-term bonds, pushing Treasury to possibly shorten debt maturities. Influencing factors include expectations of sustained inflation, high tariffs, protectionism, and political instability. The steepening U.S. yield curve and rising term premiums make long-term borrowing costly and raise rollover risk when relying more on short-term debt. Analysts speculate the share of short-term Treasury bills could rise significantly, driven by investor preferences. As market conditions evolve, the U.S., like Japan, may have to recalibrate its borrowing strategy to navigate growing fiscal and economic uncertainties.

Conclusion

The CBO's projections underscore the urgency of addressing the nation's fiscal challenges. With debt levels set to surpass historical records and interest payments consuming an increasing share of federal revenues, policymakers face critical decisions to ensure long-term economic stability and growth.