The national debt of the United States could increase more significantly than previously anticipated if countermeasures are not implemented, according to a simulation by KfW Research. The study suggests that without actions such as raising taxes or reducing spending, the US may face a stronger debt spiral. An annual deficit increase of 10 percent combined with a modest rise in interest rates could result in the national debt exceeding 170 percent of GDP within a decade. Even with a smaller annual deficit increase of 5 percent, the debt-to-GDP ratio could surpass 150 percent.
The interaction between rising interest costs and increased spending poses significant risks. Higher interest expenditures reduce budgetary flexibility and amplify the dynamics of the debt ratio when coupled with growing spending. Currently, the US national debt stands at 120 percent of GDP, surpassing the international average of 93.8 percent.
The structural budget deficit in the US is expected to persist or worsen without targeted interventions. Initiatives like former President Donald Trump's 'Big Beautiful Bill Act,' which includes long-term tax cuts, might exacerbate this structural deficit further.
Although such measures might stimulate short-term economic growth, they carry long-term risks that could render US debt unsustainable. Dr Dirk Schumacher, KfW Chief Economist, warns: “If market confidence wanes, a scenario could be set in motion with capital flowing out of the country, risk premiums rising and a dangerous interest rate/debt spiral.”
Dr Schumacher emphasizes that political leaders in the US must demonstrate fiscal responsibility in the coming years: “The crucial factor will be whether political leaders in the US have the courage to take fiscally responsible action over the next few years. The central challenge in the years to come will be finding a balance between investment, confidence and fiscal solidity.”
The complete study is available for those interested (in German).