Federal debt held by the public has remained above 90% of GDP since 2020, the highest sustained level since World War II. With deficits projected to persist, that rate is expected to climb to nearly 118.5% of GDP by 2035, per CBO estimates.
Debt at this level raises the risk of higher interest costs, slower growth and reduced budgetary flexibility, the agency warns.
How deficit spending affects the economy
When the government runs a deficit, it raises funds by issuing Treasury bonds and other securities. As the debt grows, so do the interest payments required to service it.
Interest payments have become a major drain on the federal budget, consuming more than 13% of all federal spending. By 2035, that share is projected to rise to 16.7%, or one-sixth of all federal spending, according to CBO estimates.
That means less money for public priorities like infrastructure, education and emergency aid, and less flexibility to respond to the next recession or emergency.
Persistent deficits create other economic risks, too. If government spending outpaces the economy’s ability to produce goods and services, it can drive inflation higher.
At the same time, issuing more Treasury bonds increases the supply in the market, which can lower their value and lead investors to demand higher yields.
“To entice financial institutions, households and foreigners to hold more U.S. bonds and bills, the government will have to entice them with higher interest rates,” Kris James Mitchener, professor of economics at Santa Clara University, tells CNBC Make It.
What growing U.S. debt means for your wallet
As the national debt grows, consumers could face higher interest rates on credit cards, mortgages, auto loans and other types of borrowing.
That’s because persistent deficits can lead to concerns about inflation or fiscal discipline, which in turn push Treasury yields and interest rates higher.
“If servicing the debt becomes unsustainable, consumers can expect to see higher interest rates across debt products and a slower economy overall,” Elizabeth Renter, senior economist at NerdWallet, tells CNBC Make It.
In that scenario, lawmakers may also be forced to cut spending on social programs or raise taxes, which could also directly impact household budgets.
For now, markets aren’t panicking
While rising debt and interest costs have raised concerns among economists and investors, the bond market itself has remained relatively calm in recent months.
The yield on the 10-year Treasury note — a key benchmark for borrowing costs — is holding near 4.4%, only slightly higher than a year ago. And a $39 billion auction of 10-year notes last week drew strong demand, easing fears that investors might start backing away as deficits grow.
That stability likely reflects continued global confidence in U.S. Treasuries, which are viewed as one of the safest investments in the world. Because of that trust, the effects of rising deficits may not be felt right away. But if that trust falters, borrowing costs could climb quickly.
However, the timing of that turning point is anyone’s guess. As Peter Boockvar, chief investment officer at Bleakley Advisory Group, put it July 7 on CNBC’s Squawk Box: “It doesn’t matter until it does.”
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