A U.S. ‘debt spiral’ could start in coming years when the interest rate on government borrowing exceeds economic growth, budget watchdog says | Fortune – Corporate Strategy & Outlook

According to the latest projections from the Congressional Budget Office, publicly held debt is currently at $31 trillion and is about 100% of GDP. By fiscal year 2030, debt is expected to exceed the 106% record set after World War II, then surge to 120% by 2036.

Fueling that accumulation are annual debt interest costs, which will more than double from today’s levels to $2.1 trillion by 2036, taking up a greater share of federal spending and further accelerating budget deficits.

A key driver in interest costs is the yield on bonds the Treasury Department issues to finance America’s massive debt and deficits. After years of ultra-low rates, the yield has been climbing amid previous Federal Reserve rate hikes, the unsustainable trajectory of borrowing, and concerns the Trump administration has made the U.S. less reliable in global finance.

The CBO’s forecast shows the economy will expand slower than its prior view, with nominal GDP growth (unadjusted for inflation) cooling from 4.1% in 2025 to 3.9% in 2026 and 3.8% in 2027.

Meanwhile, the Treasury Department issues debt across a range of maturities and yields. The average interest rate it pays is currently 3.316%. CBO sees the rate rising to 3.4% this year and continue to increase, reaching 3.9% in the final years of its projection period, which goes to 2036. The rising average interest rate will account for about half of the increase in interest costs over the next decade.

“CBO’s latest baseline shows an unsustainable fiscal outlook, with debt approaching record levels, deficits remaining elevated at more than twice a reasonable target, and interest costs exploding,” the Committee for a Responsible Federal Budget said in a note on Wednesday. “Later in the decade, under CBO’s baseline, the average interest rate on all federal debt will exceed nominal economic growth, which could represent the start of a debt spiral.”

Fearing the political backlash of fiscal austerity, lawmakers often point to the prospect of robust economic growth as an alternative way to keep U.S. debt under control over the long term.

But the threat of interest costs growing faster than the economy risks sending debt into escape velocity and forcing more drastic measures to prevent a crisis.

CRFB warned the actual fiscal outlook could be far worse than even the latest sobering projections. While booming revenue from Trump’s tariffs have helped mitigate deficits, they are on shaky legal ground.

“If the Supreme Court rules with lower courts that a large share of the President’s tariffs are illegal and policymakers extend various expiring or expired provisions, deficits could reach $3.8 trillion in 2036 as opposed to $3.1 trillion, and debt could grow to 131% of GDP by 2036 as opposed to 120%,” the budget watchdog added. “In this case, a debt spiral would be far more likely and the risk of a fiscal crisis would grow.”

A decision from the high court on Trump’s ability to impose his global tariffs under the International Emergency Economic Powers Act (IEEPA) could come later this month.

The administration has said it could use other laws to enact tariffs that would replace the IEEPA duties if justices rule against Trump. But that would take several months in some cases, with some levies offering a more limited shelf life.

Meanwhile, in the immediate aftermath of a court loss, tariff revenue would fall sharply, and the administration would also face claims to reimburse companies that paid the duties, forcing the Treasury to issue more debt than it planned and jolting the bond market.

Of course, the U.S. economy could outperform CBO’s growth forecasts and improve the debt outlook, especially if AI unlocks more productivity. For now, CBO has penciled in a relatively conservative view, estimating AI will add just 0.1 percentage point a year to total factor productivity growth and eventually boost output by 1 percentage point by 2036.

“The widespread adoption of the generative AI applications currently in production is expected to improve business efficiency and the organization of work and thus to lift TFP growth modestly over the next decade,” CBO said.