Why Debt Matters

Debt is Expensive

Debt comes at a cost. To fund spending beyond its revenue capacity, the government must borrow from private markets, which entails paying interest.

In 2024, interest payments accounted for 3.1% of the U.S. GDP—more than Medicaid. It is projected to rise to represent 5.4% of GDP by 2053, becoming the second-largest government expense after only Social Security.

Debt Burdens Economic Growth

Government debt is a drain on the economy. Like taxes or tariffs, it demands funds that could have been used more efficiently by the private sector—but are instead directed toward government consumption, distorting market signals, reducing productivity, and slowing overall economic growth.

But spending financed by debt, rather than taxes, represents an even larger impediment to growth because taxpayers must pay not only for the spending but also for the interest on the debt. This results in even higher costs to taxpayers than if the government had simply raised taxes.

Other consequences of debt on economic growth include:

• Economic Uncertainty: Rising debt creates uncertainty about future government actions, including potential tax increases, service cuts, and inflation, which disrupts business forecasts and investment decisions.
• Crowding Out Capital: Government borrowing competes with the private sector for capital. As a result, American households and businesses might have to pay higher interest rates to borrow, reducing investment and slowing economic growth.

Debt Imposes Unfair Costs on Future Generations

The growing national debt—driven by entitlement spending on Medicare and Medicaid—will require future generations to pay for services consumed today. This will happen either through higher taxes, inflation, or reduced government services.

As the federal government accumulates more debt, a larger portion of future budgets will be dedicated to paying interest on previous spending, leaving less room for future productive government spending.

Discretionary spending, which includes defense, education, infrastructure, and all other federal spending not encompassed by other categories listed, is forecasted to fall from representing 26% of the budget to 19% from 2025 to 2055.

The Debt is on track to become unaffordable

The federal government is projected to run increasingly larger annual budget deficits, with no expectation of ever achieving a budget surplus again. Deficits are projected to grow from 6.2% of GDP in 2025 to 7.3% by 2055.

This is a fragile position. As debt grows, a larger share of government spending is absorbed by interest payments, limiting the ability to scale back borrowing. The increased need for credit, combined with market skepticism over the government's creditworthiness, can drive interest rates higher. Higher rates mean higher borrowing costs, requiring even more debt issuance. This creates a self-reinforcing loop—rising debt leads to higher costs, which demand more borrowing—escalating the risk of default.

The fact that most federal spending is non-discretionary only worsens the situation, as there is limited flexibility to adjust course. The expectation of perpetual deficits and limited budget flexibility puts the federal government at the mercy of the market, with the government subject to the borrowing terms dictated by its creditors.