US debt burden to top second world war peak in coming years, CBO says

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The US’s federal debt burden is set to surpass the peak it reached in the wake of the second world war in coming years, Congress’s fiscal watchdog has warned, underscoring growing concerns over America’s public finances.

The Congressional Budget Office said on Thursday that the US’s debt-to-GDP ratio would reach 107 per cent during the 2029 fiscal year — exceeding the 1940s era peak — and continue rising to 156 per cent by 2055. The debt-to-GDP ratio is forecast be 100 per cent for the 2025 fiscal year.

The projections come just days after Moody’s delivered a warning about the sustainability of the US’s fiscal position, with the rating agency saying that President Donald Trump’s trade tariffs could compromise attempts to bring its large federal deficit under control by raising interest rates.

“Mounting debt would slow economic growth, push up interest payments to foreign holders of US debt, and pose significant risks to the fiscal and economic outlook; it could also cause lawmakers to feel constrained in their policy choices,” the CBO said on Thursday.

Despite the scale of the rise in the debt burden, the rate of expansion is forecast to be less drastic now than anticipated a year ago due to the CBO’s assumptions of lower interest rates, less spending on Medicare and higher revenues.

The Trump administration has pledged to find the fiscal headroom to deliver on its campaign pledge of substantial tax cuts for businesses and households.

Trump has tasked tech billionaire Elon Musk with finding $2tn in federal spending cuts by the middle of next year as the president looks to renew tax cuts put in place in 2017, during his first administration.

The president has also raised the possibility of lowering corporation tax on domestic activity from 21 per cent to 15 per cent.

The CBO calculations do not take into account the impact of Trump’s tax cuts becoming permanent — a move which the fiscal watchdog said last week would add 47 percentage points to the US’s debt-to-GDP ratio by 2054.

The Trump administration believes revenues from sweeping tariffs could plug the gap left by lower revenues from income and corporate taxes.

However, economists at the Peterson Institute, a Washington think-tank, have disputed the claim that the levies on trade will be enough to compensate for the potential loss of trillions of dollars in income tax revenues.

The US federal government has been running substantial budget deficits each year since the pandemic, with outlays exceeding revenues by 6.4 per cent of GDP last year. The CBO said that deficits would likely remain high, rising to 7.3 per cent by 2055 — slightly lower than anticipated in March 2024.

The calculations assume long-term US growth will be slightly lower than anticipated a year ago. The CBO believes that lower growth is largely down to less immigration, with the US population set to start shrinking in 2033.