New Report: National Debt Outlook Gets Worse as Interest Costs Exceed $1 Trillion Annually
Today, the Congressional Budget Office (CBO) updated its budget and economic projections, which shows that the United States remains on an unsustainable fiscal path — and unfortunately the national debt outlook worsened from last year’s projections.
Revenues over the 10-year period are lower than projected in 2025 because of the One Big Beautiful Bill Act (OBBBA). In addition, mounting debt and higher interest rates have pushed up interest costs, which threatens to crowd out other priorities. Finally, longstanding demographic pressures continue to weigh on the fiscal outlook. Taken together, CBO’s report should serve as an urgent warning for lawmakers about the need to address the debt and get the United States on a stronger fiscal path.
Below are some key takeaways from the report:
1. CBO projects that the national debt will exceed its record high in just four years.
Debt held by the public was 99 percent of gross domestic product (GDP) in 2025. However, by 2030, the structural mismatch between spending and revenues, along with higher interest payments, will cause federal debt to rise above the nation’s all-time high of 106 percent, which was reached just after World War II. CBO projects that debt will continue rising, reaching 120 percent of GDP by 2036.
2. Legislative changes account for most of the increase in deficits over the 10-year window.
Compared to the January 2025 projection, deficits will be $1.4 trillion higher. Most of that difference comes from legislative changes ($3.4 trillion), and then economic changes ($0.7 trillion). Technical changes reduced the 10-year deficit by $2.7 trillion. Those large technical changes were dominated by increased revenues associated with new tariff policies implemented since the January 2025 baseline. The new revenues are classified as technical changes under CBO’s methodology.
3. Deficits will remain high over the 10-year period.
CBO projects that the annual budget deficit will rise over the next 10 years, climbing from $1.9 trillion in 2027 to $3.1 trillion in 2036. Relative to the size of the economy, CBO projects that the nation’s budgetary shortfall will remain high and continue to grow over the coming years, reaching 6.7 percent of GDP in 2036.
4. Real gross domestic product (inflation-adjusted GDP) is expected to slow over the coming years.
CBO estimates that real GDP growth will slightly increase from 2.0 percent in 2025 to 2.4 percent in 2026 before slowing to 1.8 percent through 2036. Those growth rates fall short of some policymakers’ expectations that recent policy changes would contribute to annual GDP growth of 3 percent. A growth rate of 3 percent has been historically rare and has not been sustained over any significant period in the past 40 years.
5. Short- and long-term interest rates are projected to be higher compared to last year’s outlook.
To address high inflation, the Federal Reserve increased the federal funds rate from near zero in March 2020 to between 5.25 and 5.5 percent in July 2023, before beginning reductions to the target in September 2024. As a result, the rate on 3-month Treasury bills rose substantially from 2020 to 2023, but since then has been falling in conjunction with a lower federal funds rate.
CBO projects that interest rates will remain elevated. Short-term interest rates will lower to 3.1 percent by 2032 and remain there for the rest of the projection period. That projection is slightly higher than last year, when short-term rates were expected to lower to 3.0 percent by 2035.
CBO expects that the 10-year Treasury rate will average 4.1 percent this year, up from last year’s projection that the 10-year Treasury rate would average 3.9 percent in 2026. The agency projects that the rate will gradually rise to 4.4 percent by 2031 and remain there until the end of the projection period.
6. Interest costs on the national debt have spiked.
Higher short-term and longer-term interest rates over the last few years substantially pushed up interest costs on the national debt. Interest payments were $352 billion in 2021, but CBO projects that annual amount to exceed $1 trillion this year, and then double to reach $2.1 trillion by 2036. Relative to the size of the economy, net interest reached a high of 3.2 percent in 1991; in CBO’s projections, that ratio would be exceeded this year. Interest costs will total a staggering $16.2 trillion over the next decade.
7. Medicare and Social Security are key factors in spending growth.
Driven by an aging population and rising healthcare costs, federal spending on Medicare is projected to increase from 3.4 percent of GDP in 2027 to 4.2 percent in 2036. Spending for Social Security would also rise over that period, from 5.3 percent of GDP in 2027 to 5.9 percent in 2036. By 2036, Medicare and Social Security will comprise 17.3 percent and 24.1 percent of all federal outlays, respectively. That growth in part reflects ongoing demographic challenges. CBO’s most recent population estimates reflect declining growth in the labor force due to reduced immigration and fertility rates. Those forces combine to reduce future expected economic growth and increase pressure on health and retirement programs for an aging society.
8. Social Security’s Old-Age and Survivors’ Insurance (OASI) Trust Fund will be depleted in 2032.
According to CBO’s report, Social Security’s OASI Trust Fund depletion date has been moved up, from 2033 to 2032. Accordingly, Senators elected this year will have to address the problem during their upcoming term. Medicare’s Hospital Insurance, however, will remain solvent through the 10-year projection window.
9. Revenues will not keep pace with the growth in outlays.
Relative to the size of the economy, federal revenues are projected to rise from 17.2 percent of GDP in 2025 to 17.5 percent in 2026. Recent legislation such as the OBBBA has lowered the projected individual income tax and corporate income tax revenues. Meanwhile, changes in tariffs increased projected revenues from customs duties. CBO anticipates that total revenues will remain relatively stable over the subsequent years, averaging 17.7 percent of GDP from 2027 to 2036. Overall, changes in revenues will not be sufficient to cover the growth in outlays over the period.
CBO’s report once again shows that America’s fiscal trajectory is on an unsustainable path. The structural mismatch between federal spending and revenues, along with higher interest rates and therefore federal borrowing costs, poses challenges for the federal budget, our economy, and the nation’s future, if left unaddressed.
Further Reading
What’s the Difference Between the Trade Deficit and Budget Deficit?
The terms “budget deficit” and “trade deficit” can be conflated, but they are distinct measurements of important fiscal and economic concepts.
The Federal Government Has Borrowed Trillions. Who Owns All that Debt?
Most federal debt is owed to domestic holders, but foreign ownership is much higher now than it was about 50 years ago.
The Fed Reduced the Short-Term Rate Again, but Interest Costs Remain High
High interest rates on U.S. Treasury securities increase the federal government’s borrowing costs.