The nonpartisan Congressional Budget Office (CBO) provided an estimation regarding the potential impact of making the Tax Cuts and Jobs Act permanent. This forecast indicated that U.S. debt held by the public could rise above 200% of GDP by 2047 and 250% by 2054, assuming that increased debt levels lead to higher borrowing costs.
If the tax cuts implemented during President Donald Trump’s administration were extended indefinitely, the CBO projects that public-held debt would surpass 200% of GDP within a few decades. These cuts, a major aspect of Trump’s economic policy during his first term, are set to expire by the end of the year. However, Trump and leading Senate Republicans have advocated for making these cuts permanent.
Meanwhile, some fiscal conservatives have expressed concern, prompting a Republican legislator to request the CBO to evaluate the implications on national debt. The CBO responded, stating that without any other fiscal policy changes, the debt would reach 214% of GDP by 2054, and could hit 204% by 2047 and exceed 250% by 2054, if borrowing costs continue to rise due to the fiscal deterioration.
Currently, the total U.S. debt stands at $36 trillion, with public-held debt amounting to about $29 trillion. The annual cost to service U.S. debt has exceeded $1 trillion, surpassing the Pentagon’s budget and further exacerbating the debt problem.
The Peter G. Peterson Foundation highlighted that macroeconomic feedback could lead to increased interest rates, worsening fiscal outcomes. Meanwhile, under the CBO’s baseline assumption that the tax cuts expire, the national debt would still rise to 166% by 2054, breaking historical records, including those set immediately after World War II.
A White House official commented to Fortune that the Trump administration believes supply-side reforms, like energy production expansion, deregulation, and spending cuts, will fuel growth and expand the tax base. They maintain this would lower inflation and enable the Federal Reserve to reduce interest rates, alleviating borrowing costs. The administration also plans to increase revenue via tariffs, citing the significant income generated from China’s duties during Trump’s first term, which had minimal impact on inflation or economic growth.
The CBO report did not assess how manageable the projected debt levels would be. However, the Penn Wharton Budget Model indicates that if debt surpasses 200% of GDP, it would exceed sustainable limits. Their October 2023 report asserts that U.S. public-held debt should not exceed 200% of GDP, even under favorable market conditions at the time.
Although Japan experiences a higher debt burden, it is an atypical example due to its higher domestic savings rate, which allows Japan to absorb more government debt. According to the Penn Wharton report, 200% of GDP is an upper boundary, with a more realistic threshold closer to 175%, assuming financial markets remain confident in the government’s fiscal strategy. Should confidence wane, disruptions may occur even at lower debt-to-GDP ratios.
The CBO’s findings arrive amidst growing debt concerns. Notably, billionaire investor Ray Dalio recently predicted an imminent U.S. debt crisis. He suggested that the supply of U.S. debt would eventually surpass demand in global markets, potentially resulting in significant disruptions. Dalio mentioned the possibility of debt restructuring, pressure on countries to purchase U.S. debt, and potential political interventions affecting debt monetization.
This analysis originally appeared on Fortune.com.
