U.S. Federal public debt has risen by around 20 percentage points of GDP over the last decade, hitting a record level as a share of the economy in 2020 at the height of the Covid-19 pandemic. Though it has fallen back since, our Consensus is for the public debt-to-GDP ratio to creep up again over our forecast horizon, and political agreements over the U.S. debt ceiling are increasingly hard-won. These dynamics lead many to question — is U.S. debt sustainable?

Our Consensus Forecasts for U.S. public debt:

Our panelists see public federal debt hitting 127% of GDP by 2028, the second-highest in the G7, with our most pessimistic panelist forecasting as high as 133%, above 2020’s record. This will be a consequence of by far the widest fiscal shortfall among major advanced economies, as age- and health-related expenditures rise and the political appetite to raise taxes or restrain spending stays muted; our panelists expect the U.S. budget deficit to average around 6% of GDP in the coming years, compared to 0–3% in Canada, the Euro Area, Japan and the UK.

The U.S. economy boasts some advantages:

The U.S. can afford to run a higher fiscal deficit, and thus accumulate more nominal debt, than most other major advanced economies. One reason is that the U.S. economy is forecast to outperform in the long term, maintain real GDP growth of around 2% per year compared to around 1.5% in the UK and the Euro area. Another is investors’ perception of the U.S. government’s debt as low risk and the use of the dollar as the world’s reserve currency, which ensures sustained foreign demand for the country’s bonds.

Higher debt servicing costs beg the question: is U.S. debt sustainable?

The increase in public debt will still come at an inconvenient time: Debt servicing costs—which already more than doubled in 2023 relative to pre-Covid times—are set to rise further in the coming years due to stubbornly high bond yields. Plus, the U.S. is almost unique among major advanced economies in having a debt ceiling set at a fixed nominal figure. The upshot is that the government is unable to issue new debt to fund current spending if the U.S. debt ceiling is reached, running the risk of default. Political negotiations over raising the U.S. debt ceiling have grown increasingly fractious in recent years due to stark political polarization. The next deadline for raising the ceiling—set for January 2025—may well be missed, as already occurred last year.

In short, the U.S.’ strong growth prospects and insatiable foreign demand for Treasuries provide the economy with more fiscal breathing room than most. That said, if politicians continue to test markets’ patience by allowing public debt to rise unchecked, a debt crisis in the long term is not off the cards.

Insight from our panelists:

On debt sustainability, Goldman Sachs analysts said:

“Despite reasons for concern, we believe that the trajectory of the US debt condition is not a near- to medium-term threat, largely because of the established credibility and demand for US assets. Longer-term sustainability is nonetheless dependent on the enforcement of discipline on government spending and how well the US can manage increasingly complex geopolitical affairs.”

On interest rate payments, EIU analysts say:

“Bond yields will remain high in the coming years, pushing interest costs from 2.8% of GDP in 2023 to a peak of 4.6% in 2025, before easing to 3.4% in 2028 (still well above pre-pandemic levels). Although the US is capable of meeting its debt obligations, political tensions remain a cause for concern. The debt limit will be reimposed in 2025 and is likely to remain politicised, meaning that down-to-the-wire negotiations remain a high risk.”

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