A large and growing national debt costs the federal government more than $1 trillion a year in interest alone, money that cannot be spent on defense, infrastructure, or any other priority. But the problems extend well beyond the federal budget. High debt levels push up borrowing costs for everyday consumers and businesses, slow economic growth, and leave the country with fewer options when the next crisis hits.
Interest Payments Are Consuming the Budget
The most immediate problem is the price tag of carrying the debt. The Congressional Budget Office projects net interest outlays will exceed $1 trillion in 2026, up from $970 billion in 2025. Through March 2026, interest costs accounted for 17% of all federal spending. That share is growing: CBO estimates interest will consume nearly one-fifth of all federal spending by 2036, rising from 3.3% of GDP to 4.6% over that period. In nominal dollars, interest costs are increasing at an average annual rate of 7.5%.
Every dollar spent on interest is a dollar unavailable for anything else. When interest payments grow faster than revenue, Congress faces a choice between cutting programs, raising taxes, or borrowing even more, which only compounds the problem. Defense, health care, education, and infrastructure all compete for a shrinking share of what’s left after the interest bill is paid.
Higher Borrowing Costs for Everyone
When the federal government borrows heavily, it competes with businesses and consumers for the same pool of available money. Economists call this “crowding out.” The government’s demand for loans pushes interest rates higher, which makes car loans, mortgages, business credit lines, and student loans more expensive for ordinary borrowers.
CBO estimates that every one-percentage-point increase in the debt-to-GDP ratio raises long-run interest rates by about 2 basis points (0.02 percentage points). That sounds tiny in isolation, but the ratio has been climbing steadily for years, and the cumulative effect is meaningful. Higher interest rates also reduce the amount of capital available per worker, which lowers productivity and slows wage growth over time. Some of this pressure is offset by foreign investors buying U.S. debt, which pushes domestic rates back down, but the net effect is still less private investment than there would be with lower government borrowing.
Slower Economic Growth
Research from the World Bank examined 79 countries and found a tipping point at a debt-to-GDP ratio of roughly 77%. Above that level, each additional percentage point of debt shaves about 0.017 percentage points off annual real GDP growth. That drag may seem small in any single year, but it compounds. Over a decade, it means noticeably lower output, fewer jobs, and weaker income gains than the economy would otherwise produce.
The U.S. debt-to-GDP ratio is well above that threshold and has been for some time. Earlier research by economists Carmen Reinhart and Kenneth Rogoff, covering 44 countries, identified a somewhat higher tipping point of 90%, but the conclusion was the same: past a certain level, debt becomes a persistent headwind on growth. Reasonable people disagree on the exact number, but few economists dispute that the relationship exists.
Less Room to Respond to Emergencies
Recessions, pandemics, natural disasters, and military conflicts all require governments to spend heavily in a short window. A country carrying moderate debt can borrow quickly to fund stimulus checks, emergency relief, or a military buildup, then pay down the balance once the crisis passes. A country already deep in debt has far less flexibility.
Part of the constraint is mechanical. The debt ceiling restricts how much the Treasury can borrow at any given time, and political fights over raising it become more fraught as the total debt grows. But the deeper issue is financial. When debt is already high and interest costs are already consuming a large share of the budget, new borrowing adds interest on top of interest. Investors may also demand higher rates to lend to a government they see as increasingly stretched, making emergency borrowing more expensive precisely when it’s most needed.
A higher debt-to-GDP ratio signals to lenders and rating agencies that a country may struggle to repay. That perception alone can raise borrowing costs and narrow the government’s options during a downturn.
Credit Downgrades and Dollar Risks
The United States has already had its credit rating downgraded twice, a once-unthinkable event. These downgrades matter because they signal to global investors that U.S. debt carries more risk than it used to. When investors perceive more risk, they demand higher returns, which raises the interest rate the government has to pay on new borrowing, and those higher rates ripple through the rest of the economy.
CBO has also warned that high and rising debt could erode confidence in the U.S. dollar as the world’s dominant reserve currency. The dollar’s reserve status gives the U.S. enormous advantages: it keeps demand for Treasury bonds high, holds down borrowing costs, and gives American consumers access to cheaper imports. If foreign governments and central banks begin diversifying away from the dollar, even gradually, those advantages shrink. Fitch, one of the major rating agencies, explicitly cited declining “coherence and credibility of policymaking” as a threat to the dollar’s reserve status when it downgraded U.S. debt.
The Risk of a Fiscal Crisis
The most severe scenario, and the hardest to predict, is a fiscal crisis: a sudden loss of investor confidence in the government’s ability to manage its debt. In such an event, interest rates would spike abruptly, the cost of rolling over existing debt would soar, and financial markets would face serious disruption. CBO identifies growing federal debt as a factor that increases this risk over time.
A fiscal crisis doesn’t arrive with a warning. Countries that experience them often look stable right up until the moment they don’t. The U.S. benefits from deep capital markets, a strong legal system, and the dollar’s global role, all of which provide a substantial buffer. But none of those advantages are guaranteed to hold indefinitely if debt continues growing faster than the economy. The larger the debt becomes relative to GDP, the smaller the margin for error and the greater the consequences if confidence breaks.