There is now widespread concern that the US faces an unsustainable fiscal future under current policies. The rise in the debt-to-GDP ratio since 2001 can be explained by responses to the Global Crisis and Covid-19 pandemic, as well as tax cuts and discretionary spending increases. This column argues that after incorporating the One Big Beautiful Bill Act, debt-to-GDP is projected to rise to 183% by 2054, under conservative assumptions. Without a return to an earlier period of fiscal responsibility, adjustment in US fiscal policy will likely involve some external shock that forces changes in policy.
Economists have long warned of the negative consequences of excessive US public debt (e.g. Friedman 1988). Yet the US government’s public debt has risen dramatically over the past 25 years without a fiscally induced crisis. Indeed, after the Global Crisis, when government interest rates were extremely low in the US – and negative in some other countries – a spirited debate arose, with many leading economists (e.g. Elmendorf and Sheiner 2016, Blanchard 2019, Furman and Summers 2020) downplaying concerns about debt accumulation.
Nevertheless, there is now widespread concern that the US faces an unsustainable fiscal future under current policies. Fiscal issues have returned to the fore for several reasons. Higher debt and higher interest rates in recent post-pandemic years have measurably hurt the budget outlook. Policy makers have not only stopped enacting policies that offset large impending deficits (Auerbach and Yagan 2025), they also recently enacted the “One Big Beautiful Bill Act” of 2025 (OBBBA), which substantially reduces long-run tax revenues and thus boosts projections for primary deficits and long-term debt. Even without new deficit-increasing policies, current projections trace out a trajectory of persistent and substantial primary deficits that, as a share of GDP, exceed those of the past outside of wars and recessions, building in growth in the debt-GDP ratio. Meanwhile, the exhaustion dates for Social Security and Medicare trust funds have become perilously close: eight years is not much time, given the delays and obstacles in reaching political agreement and enacting adjustments on a contentious issue. The Fed accumulated substantial Treasury holdings during the COVID-19 pandemic; unwinding that portfolio may put pressure on interest rates, which would exacerbate the fiscal outlook. Finally, reducing the trade deficit has become a key goal of economic policy in the Trump Administration, and a basic macroeconomic identity implies that a country that spends more than it produces – to which government spending in excess of revenues contributes – will run a trade deficit.
In Auerbach and Gale (2025), we review US budget trends, provide new estimates of the budget outlook, incorporating the OBBBA and alternatives, and discuss the economic and political ramifications of debt and different ways of addressing the US fiscal situation.
Budget trends
After showing deficits every year from 1970 to 1997, the US federal budget was in surplus in fiscal year 2000 for the third year in a row, and the surplus reached a post-war high of 2.3% of GDP. The Congressional Budget Office (CBO 2001) projected that surpluses would increase over time and that all available redeemable public debt would be redeemed by 2006. Leading policymakers and academics confronted the problem of how monetary policy would be conducted and where investors would find safe assets if there were no available US public debt. The need to maintain a stock of public debt was a key motivation cited by Greenspan (2001) in his pivotal support of tax cuts. Shortly thereafter, Congress enacted, and President George W. Bush signed, major tax cut legislation.
Since then, a series of policy changes and economic shocks have led to a substantial increase in the debt-GDP ratio, as shown in Figure 1. From 2001 to 2007, a series of tax cuts and mandatory and discretionary spending increases kept the debt-GDP ratio roughly constant – when it otherwise would have fallen to about zero (Auerbach and Gale 2009, CBO 2001). The Global Crisis and associated policies boosted debt substantially, and then the COVID-19 pandemic and fiscal responses caused debt to rise sharply again. The debt-GDP ratio jumped from 39% in 2008 to 70% by 2012, and from 79% in 2019 to 98% in 2020, and has hovered at that level since then. These two large jumps in the debt-GDP ratio were sizable but not unprecedented in US history, but a major difference from earlier periods is that the recent jumps were followed by relative stability of the debt-GDP ratio rather than a rapid fall, as government failed to take advantage of the opportunity to reduce deficits and continued to increase spending and cut taxes, all while demographic change and increasing health care costs contributed to growing deficit pressures from old-age entitlement spending.
Figure 1 US publicly held debt (percent of GDP)
Source: Congressional Budget Office
How important were different factors in causing this century’s sharp increase in the US debt-GDP ratio? The Committee for a Responsible Federal Budget (CRFB 2024) employs a standard baseline – taxes and mandatory spending follow current law; discretionary spending is constant in real terms for ten years and then remains a constant share of the economy. Relative to that baseline and starting from 2001, they find that major tax cuts account for 37 percentage points of the 98% debt-GDP ratio at the end of the 2023 fiscal year. Discretionary spending increases and Medicare expansion account for 33 percentage points. Responses to the recessions due to the Global Crisis and the COVID-19 pandemic account for 28 percentage points of the debt-GDP ratio. In the absence of any of these policies, the 2023 debt-GDP ratio would have been zero (assuming no differences from the actual economic trajectory, which is a standard assumption but may be particularly strong in this case because of the magnitude of the changes and the long time period involved).
Projections
Going forward, with the passage of the OBBBA in the summer of 2025, projections of the US debt-GDP ratio show a sustained increase. Starting from CBO projections made prior to the legislation’s passage (CBO 2025a), which project a debt-GDP ratio in 2054 of 154% of GDP, Auerbach and Gale (2025) project a 2054 debt-GDP ratio of 183% of GDP as a result of the legislation. As this projection does not take account of any possible increases in the interest rate on government debt arising from the faster growth of debt, it represents a very conservative estimate. Were one to assume that the temporary tax cuts included in the legislation were made permanent, the projected debt-GDP ratio would rise to 199%, again without further increases in interest rates.
One important caveat about these projections is that they do not incorporate increases in tariffs since the March CBO projections. If current tariffs remain in place, they could raise additional substantial revenue, reducing the 2054 debt-GDP ratio by between 18 and 24 percentage points of GDP relative to the projections just given. However, there are major uncertainties about this additional revenue, both because of the potential economic damage arising from the tariffs and the legal challenges they face, currently under review by the Supreme Court.
Where do we go from here?
Facing a path on which its debt-GDP ratio grows explosively, what are the options for the US? One might expect that, in an environment of fiscal dominance, with accommodating monetary policy, an unexpected burst of inflation, though undesirable, could help lessen fiscal pressure by reducing the real value of debt outstanding. However, with large projected primary deficits mostly determined by real factors and therefore not reduced by inflation, the lack of sustainability would remain, with the debt-GDP ratio growing sharply over time. Some might hope that, as Social Security and Medicare trust funds approach exhaustion, this might prompt fiscal consolidation of the form taken in 1983, when the government raised taxes and the retirement age to rescue the Social Security trust fund from impending insolvency, which by law would have required a reduction in benefits, as it would today. However, in the current setting, where, as discussed above, government no longer appears to respond to fiscal challenges, trust funds might simply be replenished through government borrowing, which would do nothing to improve overall fiscal sustainability. Budget rules and procedures also appear not to have enhanced fiscal discipline, as illustrated by the recently concluded government shutdown, which likely reduced GDP slightly (CBO 2025b) and was resolved without budget cuts or tax increases, but with a commitment to consider further unfunded spending increases in the near future.
In short, without a return to an earlier period of fiscal responsibility, when government policy changes were responsive to large impending deficits, it is difficult to see a path forward for US fiscal policy that does not involve some external shock that forces changes in policy.
Source : VOXeu
