A Look Back and Ahead at the Federal Budget

A quarter of a century later, it is safe to say that this “problem” has been resolved. At the end of fiscal year 2024, US federal debt held by the public was approximately $28 trillion, or 98 percent of GDP. Our research provides new federal budget projections that account for the passage of the One Big Beautiful Bill Act of 2025 (OBBBA). It also discusses the economic and political ramifications of debt and explores different ways to address the fiscal situation.

Economists have long warned of the negative consequences of excessive US public debt. Despite these warnings, the government’s public debt has risen dramatically over the past 25 years without triggering a fiscal crisis. Indeed, a spirited debate arose after the 2008 global financial crisis, when government interest rates were extremely low in the United States (and negative in some other countries), leading many influential economists to downplay concerns about debt accumulation. Nevertheless, widespread consensus now holds that the United States faces an unsustainable fiscal future under its current policies. Higher debt and interest rates in recent years have substantially worsened the budget outlook, prompting Moody’s to downgrade the credit rating of US long-term debt.

Policymakers have not only stopped enacting policies to offset deficits (when annual spending exceeds revenue) but also enacted the OBBBA, which substantially reduces long-run tax revenue by more than it reduces long-term spending, thereby boosting projections for both annual deficits and long-term debt. Over the next decade, deficits will increase by more than $4.2 trillion due to the OBBBA, a figure that rises to $5.5 trillion if its temporary spending and tax provisions are made permanent. Moreover, the OBBBA was enacted through a budget maneuver that disregarded long-standing budget rules and conventions. If Congress follows this precedent, major tax reductions will become easier to enact, further threatening the fiscal outlook.

Our analysis finds that federal deficits and the debt-to-GDP ratio will rise substantially and inexorably over the next several decades under any plausible set of economic assumptions, with no natural turning point in sight. Assuming interest rates remain constant despite the additional deficits created by the OBBBA, we project federal debt will reach 183 percent of GDP by 2054, or 199 percent if its temporary provisions are made permanent. Recent research finds that a 1 percentage point rise in the debt-to-GDP ratio increases interest rates by about 0.03 percentage points. Should this hold true, the debt-to-GDP ratio would climb to 204 percent by 2054, or 233 percent if the temporary provisions become permanent. For comparison, the Congressional Budget Office projected in March 2025 that, without the OBBBA, the debt-to-GDP ratio would be 154 percent in 2054.

If the OBBBA’s temporary provisions expire as scheduled, maintaining the debt-to-GDP ratio at its 2024 level (about 98 percent) by 2054 would require a combination of permanent spending cuts or tax increases equaling 2.87 percent of GDP, assuming these changes begin in 2026. Expressed in 2024 terms, this amounts to about $827 billion. This figure represents about 34 percent of income tax revenue, 17 percent of all tax revenue, 14 percent of noninterest spending, or 24 percent of noninterest spending other than Social Security and Medicare for that year. If the OBBBA’s provisions are made permanent, the required spending cuts or tax increases would increase to 3.43 percent of GDP. Delays in implementing these corrective actions would further escalate the scale of the interventions needed.

Higher productivity than projected, possibly driven by the diffusion of artificial intelligence, would reduce the debt-to-GDP ratio. But even if annual productivity growth remains 0.5 percentage points higher than projected—a substantial increase—the debt-to-GDP ratio would still increase to about 158 percent by 2054, assuming the OBBBA’s temporary provisions expire. While tariff revenue could have a substantial fiscal impact, it remains unclear how long current tariff levels—which are higher than those during the Great Depression—can be sustained.

While maintaining national debt has some benefits, our long-term projections raise several concerns. Deficits used to finance consumption or transfers reduce national saving and, in turn, future national income. This might occur because higher interest rates reduce investment, thereby diminishing the nation’s future capital stock and output. Alternatively, this might occur because increased borrowing from foreigners helps preserve future output but increases the amount residents owe foreigners, thereby reducing national income in the long run. Moreover, the projected debt path will diminish the government’s ability to respond to recessions, social needs, and military contingencies. More broadly, if the fiscal outlook features frequent and unpredictable shifts in economic policy, it could threaten US global economic leadership, the dollar’s reserve-currency status, and the safe-haven status of Treasury debt. None of these possibilities depends on deficits triggering a financial crisis, which seems unlikely in the near term, at least for economic reasons. However, political missteps could pose a serious problem.

Note:
This research brief is based on Alan J. Auerbach and William Gale, “Then and Now: A Look Back and Ahead at the Federal Budget,” National Bureau of Economic Research Working Paper no. 34455, November 2025.