The United States is approaching a critical juncture in its fiscal trajectory, with publicly held debt reaching 99 percent of GDP and projected to climb to 107 percent by 2029—a level surpassing the post-World War II peak. Interest payments on the national debt already consume over $11 billion weekly, accounting for 15 percent of federal expenditures in the current fiscal year. Economists have examined various strategies to address this growing imbalance, including stronger economic growth, lower interest rates, inflation, default, financial repression, and spending cuts.
Faster growth, while ideal, is unlikely to resolve the issue due to a shrinking labor force, despite potential productivity gains from artificial intelligence. The era of historically low interest rates appears to be over, and default remains politically unfeasible, especially after previous disruptions like former President Donald Trump’s tariff policies raised concerns about Treasury securities’ reliability.
Using inflation to erode the real value of debt would carry consequences similar to default, undermining confidence in the currency. Financial repression—where the government pressures banks to purchase bonds at artificially low returns—is another theoretical option but comes with significant market distortions.
That leaves severe fiscal austerity as the most plausible path forward, according to economist Jeffrey Frankel in a recent Project Syndicate commentary. He estimates that stabilizing the debt would require eliminating nearly all defense spending or almost all non-defense discretionary funding. However, political realities make immediate action unlikely: Democrats are expected to resist cuts to major social programs, while Republicans may favor tax reductions over fiscal discipline.
Frankel warns that meaningful reform may only occur after a serious fiscal crisis triggers a loss of confidence in U.S. debt. A similar view is held by Oxford Economics, which predicts that the projected insolvency of Social Security and Medicare trust funds by 2034 could act as a catalyst. Initially, lawmakers might attempt to delay reform by redirecting general revenues to these programs, but such moves could provoke negative reactions in bond markets. A sharp rise in long-term interest rates might ultimately force Congress to reconsider its approach.
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US debt crisis: Most likely fix is severe austerity triggered by a fiscal calamity
Publicly held debt is already at 99% of GDP and is on track to hit 107% by 2029, breaking the record set after the end of World War II. Debt service alone is more than $11 billion a week, or 15% of federal spending in the current fiscal year.
In a Project Syndicate op-ed last week, Frankel went down the list of possible debt solutions: faster economic growth, lower interest rates, default, inflation, financial repression, and fiscal austerity.
While faster growth is the most appealing option, it’s not coming to the rescue due to the shrinking labor force, he said. AI will boost productivity, but not as much as would be needed to rein in U.S. debt.
Frankel also said the previous era of low rates was a historic anomaly that’s not coming back, and default isn’t plausible given already-growing doubts about Treasury bonds as a safe asset, especially after President Donald Trump’s “Liberation Day” tariff shocker.
Relying on inflation to shrink the real value of U.S. debt would be just as bad as a default, and financial repression would require the federal government to essentially force banks to buy bonds with artificially low yields, he explained.
“There is one possibility left: severe fiscal austerity,” Frankel added.
How severe? A sustainable U.S. debt trajectory would entail elimination of nearly all defense spending or almost all non-defense discretionary outlays, he estimated.
For the foreseeable future, Democrats are unlikely to slash top programs, while Republicans are likely to use any fiscal breathing room to push for more tax cuts, Frankel said.
“Eventually, in the unforeseeable future, austerity may be the most likely of the six possible outcomes,” he warned. “Unfortunately, it will probably come only after a severe fiscal crisis. The longer it takes for that reckoning to arrive, the more radical the adjustment will need to be.”
The austerity forecast echoes an earlier note from Oxford Economics, which said the expected insolvency of the Social Security and Medicare trust funds by 2034 will serve as a catalyst for fiscal reform.
In Oxford’s view, lawmakers will seek to prevent a fiscal crisis in the form of a precipitous drop in demand for Treasury bonds, sending rates soaring.
But that’s only after lawmakers try to take the more politically expedient path by allowing Social Security and Medicare to tap general revenue that funds other parts of the federal government.
“However, unfavorable fiscal news of this sort could trigger a negative reaction in the US bond market, which would view this as a capitulation on one of the last major political openings for reforms,” Bernard Yaros, lead U.S. economist at Oxford Economics, wrote. “A sharp upward repricing of the term premium for longer-dated bonds could force Congress back into a reform mindset.”