WASHINGTON, Oct. 19 — The U.S. national debt reached $40 trillion in August, raising questions for President Donald Trump and Republicans ahead of next month’s closely contested midterm elections: Is the world’s largest economy becoming a riskier borrower in financial markets?
So far, the evidence suggests it is not.
Global bond markets are pushing borrowing costs higher across countries, but analysts say the additional return investors demand to hold U.S. debt — known as the term premium — has not shown a worrying increase linked specifically to America’s creditworthiness.
Still, risks remain. The Trump administration has yet to take concrete measures to reduce federal deficits or contain rising borrowing costs, relying instead on the promise that faster economic growth will help resolve the country’s fiscal challenges.
Officials also argue that Trump’s sweeping tariffs on imports will help ease the government’s financial pressures.
Rising borrowing costs are already affecting mortgage rates and other consumer loans ahead of the November 3 congressional elections. Polls indicate Republicans could lose control of the Senate and House of Representatives, while voters continue to identify rising costs as a major concern.
On Friday, the Treasury reported a budget deficit of roughly $2 trillion for the fiscal year that ended September 30. That was 12% higher than the previous year and the largest shortfall since the federal spending surge during the COVID-19 pandemic.
Annual deficits remain elevated
U.S. budget deficits typically expand during crises or recessions, but the country’s shortfalls have remained substantial even as the economy grows.
Tax cuts, age-related entitlement programs, increased military spending, tariff rebates and rising interest expenses have all contributed to continued borrowing.
The fiscal 2026 deficit was the third-largest on record, while federal debt-servicing costs reached a record $1.36 trillion.
Government spending exceeded revenue by an amount equivalent to approximately 6.2% of gross domestic product. Analysts say a sustainable annual deficit, assuming typical economic growth, would be closer to 3% of GDP.
Federal debt approaches the size of the economy
The financial crisis of 2007–2009, the 2020 pandemic and Trump administration tax cuts have helped push publicly held federal debt to roughly the size of the U.S. economy.
Although total federal debt reached $40 trillion, that figure includes obligations to government accounts such as the Social Security Trust Fund. Debt owed to Treasury bondholders stands at approximately $32 trillion.
The debt-to-GDP ratio is now around 100%, a level last seen during the financing of World War II.
Economists disagree over whether this level of debt represents a serious problem and whether the United States could eventually reach a tipping point. A U.S. debt default, which would severely disrupt global financial markets, is considered highly unlikely.
Nevertheless, some Federal Reserve officials have warned that the country could eventually face a reckoning. The consequences would depend on economic growth and how policymakers respond to the fiscal situation.
Interest payments consume more resources
Higher interest rates and increasing debt have pushed the share of national income devoted to federal debt payments to levels comparable with those seen after the Federal Reserve’s aggressive inflation-fighting rate increases in the 1970s and 1980s.
The Trump administration maintains that stronger economic growth will help prevent the debt burden from becoming unmanageable.
But higher global bond yields are making it more expensive for the United States to finance its borrowing needs. The government must also compete with other financially stable countries and companies seeking investment capital, including businesses funding artificial intelligence projects.
Analysts warn that economic growth alone may not be enough to break the cycle of rising debt, higher interest rates and escalating borrowing costs.
“Every candidate on the 2026 campaign trail should be asked how they would work to put the budget on a sustainable track,” said Carolyn Bourdeaux, executive director of policy advocacy group Concord Action.
“Without real action on these vital fiscal issues, America is careening toward an ominous fiscal crisis that would leave all of us much worse off sooner than anyone in Washington apparently wants to believe.”
Tariff revenue faces setbacks
Tariffs have been a central part of Trump’s economic policy, generating additional federal revenue by taxing imports and potentially raising costs for exporters, importers and consumers.
The policy initially directed tens of billions of additional dollars to the government. However, the Supreme Court struck down many of the tariffs earlier this year, forcing the government to issue $145 billion in refunds and wiping out much of the revenue gains.
Even before the refunds, tariff revenue represented only a small portion of the overall gap between government spending and tax receipts.
Federal Reserve officials have partly blamed Trump’s import tariffs for recent inflation.
The November elections could influence the future of U.S. tariff policy. If Democrats gain control of either chamber of Congress, they could use their legislative and oversight powers to challenge the administration’s approach.
Consumers face rising borrowing costs
U.S. borrowing costs continue to climb despite efforts by Treasury Secretary Scott Bessent to contain them.
Bessent had identified the 10-year Treasury yield as a measure of his success, but yields have continued to rise. Some analysts expect interest rates to remain elevated for an extended period.
The effects extend beyond financial markets. As overall borrowing costs increase, Americans face higher mortgage rates and more expensive credit.
According to Freddie Mac, the rate on a 30-year mortgage recently reached a high of 7.40%, compared with the ultra-low rates of around 3% that were common during the 2010s.
With deficits remaining large and debt-servicing costs increasing, the administration’s ability to manage federal borrowing without placing further pressure on households is becoming an important economic and political challenge.
Original article
Comments