US national debt passed $40tn (£29.4tn) this week, a milestone economists call a warning sign rather than a crisis point. Rising interest costs, driven by higher rates and heavier government borrowing, are already pushing up rates for households and businesses. Growth over the next few years will decide whether the burden eases or deepens.
How the debt reached $40 trillion
US national debt passed the $40tn mark this week, a milestone driven by public spending surges under both the Donald Trump and Joe Biden administrations. Ballooning costs for social programmes have outstripped revenues undermined by tax cuts, while responses to the 2008 financial crisis and the Covid pandemic added to the borrowing.
At the start of Trump's first presidential term in 2016, US national debt stood at just under $20tn — it has doubled in the decade since. The figure is now rising by about $90,000 every second, or $7.8bn a day, according to the Congress Joint Economic Committee.
Why interest costs are rising
Higher rates set in response to recent inflation shocks have made the debt more expensive to carry. Interest payments on government debt are now 15% higher than the same period last year. They are almost 20% of tax revenue, which economist Mohamed A El-Erian says is larger than defence spending.
The US is nearing its $41.1tn debt ceiling. Debt is forecast to climb to about $64tn by 2036, according to the Congressional Budget Office. Even so, US debt at 126% of the size of the economy remains lower than fellow G7 members Japan and Italy, though investor appetite for buying US bonds is diminishing.
What it means for households
Households will likely face higher rates for mortgages, auto loans and credit cards as a result, with those on lower incomes hit hardest, El-Erian says. Higher borrowing costs for firms are often passed through to consumers via higher prices too.
The Treasury stepped in on Wednesday to buy back government debt, boosting demand for bonds and lowering borrowing rates, but the effect was short-lived as long-term borrowing costs bounced back up a day later. According to BBC News: "we are spending more than that just on interest payments on our debt", says Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
Sustained economic growth would ease the debt burden by lifting tax revenue, El-Erian notes. Without it, the US may eventually have to weigh reforming the tax system and public spending, or even debt restructuring — though El-Erian doubts Washington is ready to look at those options.
Source: BBC News
Trading involves risk.
Risk Disclaimer
