Taxes, spending, debt, and deficits under Trump 2.0

POTUS 47

18 Dec 2024

At a glance

We do not expect a significant change in the fiscal deficit under Trump 2.0. An already high deficit will force compromise on tax cuts and spending pledges, and we think corporate tax cuts are unlikely in the absence of much higher tariff income.
With a government deficit of more than 7.5% of GDP and government debt-to-GDP ratio rising beyond 120%, questions about debt sustainability are more pertinent than ever.
The reserve currency status of the US dollar, the US’ deep capital markets, and the significant wealth held by US households mean we do not see a US debt crisis as imminent. At the same time, the US government does not have an unlimited borrowing capacity.
While higher economic growth and lower interest rates may help stabilize the government debt-to-GDP ratio, some combination of financial repression, entitlement reform, and higher taxes will likely be required in the future.

Fiscal policy under Trump 2.0

Our base case: constraints on fiscal policy limit deficit growth

Despite Republicans winning the White House, flipping the Senate, and retaining the House of Representatives in November’s election, we don’t think President Trump will be given a blank check to pursue all the pledges and promises that he made on the campaign trail.

We expect fiscal policy in the first two years of the Trump administration to provide little additional boost to economic activity because of the following three constraints:

1. Thin congressional majorities

Margins in the Senate and the House are thin. Republicans hold a 53-seat majority in the Senate, but such an advantage might not hold up if fiscal hawks from within the Republican Party challenge tax and spending plans in reconciliation (a process that only requires 50 votes plus Vice President Vance’s tiebreaker). And any attempts to pass a budget and avoid the 60-vote filibuster threshold would require a bipartisan effort with Democrats also signing onto the legislation, which we see as unlikely.

Meanwhile, the House Republican majority stands at a narrow 220 seats (218 votes are needed to pass legislation) and is slimmer still after three of President Trump's cabinet appointments came from the House, forcing special elections throughout 2025 to choose replacements.

2. High deficits

In 2017, growth in deficits wasn’t a constraint on additional fiscal spending: Congress passed the 2017 Tax Cut and Jobs Act through reconciliation, but without 12 House Republicans who were concerned about the Congressional Budget Office’s estimate at the time that the legislation would add more than USD1.4 trillion to the deficit over 10 years. Reconciliation does not require spending and revenues to balance, it just can’t touch Social Security or result in persistent deficits after 10 years. As a result, sunset provisions are often incorporated into bills.

Today, the federal deficit-to-GDP ratio is already double what it was heading into Trump’s first term (see Fig. 1). And, according to the Committee for a Responsible Federal Budget, the estimated additional cost of President Trump’s tax and spending proposals over 10 years in a central base-case scenario would be USD7 trillion (nearly a quarter of one year’s GDP) and an upside risk case of USD15 trillion (a bit more than half of US annual GDP).

Figure 1: US deficits have doubled as a share of GDP since 2015

US general government net borrowing as a share of GDP, in %

With today’s much higher budget deficits and narrow majorities, we think Congress is likely to be reticent to approve measures which would widen the deficit further. In fact, some members of the administration have spoken about lowering the deficit-to-GDP ratio to 3%.

3. Interest rates

Higher interest rates will further boost the US government’s debt service costs during the next administration. Interest payments on the debt now exceed spending on defense (see Fig. 2), a development which historian Niall Ferguson has linked to geopolitical decline.

Figure 2: Net interest expense exceeded defense in fiscal 2024

US federal government defense and net interest outlays, in USD billions

A further rise in longer-term bond yields could force additional discipline on Congressional leaders. While we expect somewhat lower borrowing costs in our base case, upside risks to yields come from the Fed allowing more of its US Treasury holdings to roll off its balance sheet into public markets, foreign central banks diversifying their US dollar-denominated assets toward gold, and the risk of inflation reaccelerating on immigration and tariff policies.

What path could fiscal policy take in 2025?

Facing narrow majorities in Congress, Republicans will likely need to use a legislative process known as reconciliation to achieve their tax and spending goals. Reconciliation requires only a simple majority in the Senate instead of the usual 60-vote majority to avoid a filibuster. Much about the process, timeline, and details to arrive at a fiscal plan are in flux, but we can already begin to see some broad contours forming.

Senior Republicans are eyeing a strategy to secure an initial reconciliation package within the first 100 days of President Trump’s administration, focused on border security. Such a bill would align with executive actions early in Trump’s second term to reverse immigration policies under President Biden, and would likely also secure funding for border patrol personnel and to extend the wall along the border with Mexico.

We expect a second reconciliation bill to arrive later in 2025 that focuses on extending the expiring provisions of the 2017 tax package. Tax and spending bills are more complicated and require time to craft, especially one with a goal of extending broad individual income tax cuts without obvious ways to pay for it. Fiscally conservative Republicans will likely seek offsets to the sizable cost of extending the tax cuts and will need time to assess the political viability of potential revenue-raising measures and spending cuts necessary to limit or avoid further deficit increases.

We see a few possibilities for how the Republicans could follow through on some policy pledges while avoiding a significant increase in the deficit, and in a form which could pass reconciliation.

Limit the personal tax-cut extension to a shorter horizon.

Government budget projections assume tax cuts expire according to current law. Extending personal tax cuts would produce greater foregone revenues for every year that the lower tax rates are in place.

One way to trim the expense is to shorten the extension from 10 years to, say, 4 or 5 years. The Congressional Budget Office (CBO), which provides nonpartisan fiscal analysis for Congress, estimated in May 2024 that extending the individual income tax cuts for 10 years would raise deficits by nearly USD4 trillion including interest, but only by USD1.3 trillion if the cuts were extended over only five years (see Fig. 3).

Figure 3: Shorter horizon limits deficit impact of extending tax cuts

Projected deficit increase from personal income tax cut extensions, in percentage points of GDP

Shortening the time horizon on personal tax cuts could also help Republican leaders stay below an agreed-upon cumulative deficit target and help fund other policy pledges, like corporate tax cuts, lifting the State and Local Tax (SALT) deduction, and retaining the higher estate-tax exemption.

Incorporate tariff income.

Republicans will likely discuss creative attempts to use tariff income to pay for tax cuts in the reconciliation process, especially tariffs on China where there is bipartisan agreement to take a tough trade stance.

But using tariff income to offset tax cuts in reconciliation—a legislative process that has only been around since the 1980s—is untested and may prove procedurally difficult. Incorporating tariff revenue into legislation would also force lawmakers to vote on a potentially controversial and economically costly issue, rather than watch from the sidelines.

If the administration were to choose to impose universal tariffs without consent from Congress, there is also some debate among legal scholars as to whether the courts would enjoin such a move. Of course, if such an approach is allowed by the Supreme Court, the Republicans could set their deficit targets higher, and rely on tariff revenues to help close the gap. In the 1800s, tariff revenue had been used almost exclusively to finance government spending (see Fig. 4).

Figure 4: Tariff revenue a small share of government revenue

Customs receipts as a share of total federal receipts, in %

Today, tariff income is low: existing tariffs on goods raised just USD80 billion in 2023. According to a Tax Foundation analysis, imposing 10% universal tariffs would raise an additional USD2 trillion over 10 years. But this estimate doesn’t reflect the worsening deficit picture that would likely emerge on account of weaker US and global economic activity.

Generate cost savings or additional revenue.

Compared to what is needed to stabilize the debt-to-GDP ratio, efforts to create savings through reduced spending or revenue increases while extending the 2017 tax cuts is the fiscal policy equivalent of looking for coins in the couch cushions. The efficiency gains derived from the Department of Government Efficiency (DOGE) are highly unlikely to meet the ambitious USD2 trillion in spending cuts even if considered over several years. As we outline in the next section on debt sustainability, real cost savings eventually impact real benefits for real people, which is not a winning political strategy.

DOGE may have the wind at its back thanks to a summer 2024 Supreme Court decision that reverses a four-decades-old legal precedent known as Chevron deference. This precedent previously gave executive branch agencies broad authority to define the scope of ambiguous or vague legislation on topics ranging from health to energy to telecommunications. The reversal of Chevron deference could facilitate the administration’s goal to shrink regulatory oversight and enforcement of rules that are not explicitly written in statutes. This cuts both ways, however, and the ruling also makes it harder to cut spending in areas that are well-defined in legislation.

As an example, Republicans have long threatened to close the Department of Education under the guise of removing bureaucratic red tape and reducing the size of the federal government. But it is clear in legislation that eliminating entire agencies of the federal government would require 60 votes in the Senate. And even if Republicans used reconciliation to redirect programs and spending to other agencies, eliminating the Department of Education’s personnel and contractual services would only save the government USD3.8 billion per year, a tiny fraction of the department’s annual budget, which is predominantly in the form of grant programs (see Fig. 5).

Figure 5: Personnel costs a small part of federal spending

Obligated amounts by top 10 federal departments by budget size, in USD trillion

There has also been considerable discussion about Republican interest in rolling back some of the spending provisions of the Inflation Reduction Act. But such a move might not be popular with members who have touted renewable energy investments in their congressional districts. So some of the clean energy tax credits, such as those on electric vehicles, may be at risk, but not the entire clean energy investment agenda. On the revenue side, the federal government could look to remove the tax exemption for newly issued municipal private activity bonds, as an example, but this would not raise much additional revenue (estimated at about USD30 billion over 10 years) and would potentially raise funding costs for issuers.

Implications of our base case for fiscal policy on interest rates

Even before the election outcome was known, the bond market had been attempting to price in the probabilities of various Trump policy proposals and their implications for growth, inflation, and future Fed policy (see Fig. 6). Yields moved higher in anticipation of, and following, Trump’s victory. In our base case, we expect bond yields to trend modestly lower from current levels as the Fed gradually removes policy restrictiveness. We also anticipate ongoing volatility in term premia and swap spreads as market participants speculate on the future fiscal policy path.

Figure 6: Base case assumes modestly lower bond yields in 2025

10-year Treasury note yield and the Fed funds target rate, in %

The appointment of Scott Bessent as Treasury Secretary provided some support to bonds on the view that he will stress the risks that growing deficits could pose to Treasury market functioning and broader financial conditions. The Fed has also acknowledged funding and liquidity risks building within the financial system as ongoing Treasury supply drains bank reserves. Accordingly, the Fed is exploring measures to ensure short-term funding rates remain anchored as its balance sheet returns to its higher steady-state level.

The potential for expansionary fiscal policy to prompt higher inflation, a de-anchoring of longer-term inflation expectations, and a hawkish pivot from the Fed is more of a risk case, in our view. We also do not expect a sharp contraction in fiscal policy from an inability to extend the 2017 tax cuts beyond their expiration in 2025.

US debt sustainability

As we’ve discussed in the first section, finding offsets to tax cuts that would grow the deficit is different from reaching a consensus on tax hikes, spending cuts, and entitlement reforms that would actually reduce the deficit and bring about a more sustainable debt trajectory. This is the subject of this next section.

Forecasts have routinely underestimated the weakness in US government finances, and debt has been on a steady upward climb (see Fig. 7). According to data from the International Monetary Fund, the US debt-to-GDP ratio rose from 53% in 2001 to over 100% early in the next decade following President George W. Bush’s tax cuts and the response to the 2008-09 global financial crisis. The 2017 Tax Cuts and Jobs Act and the strong fiscal support during the Covid-19 pandemic pushed the US debt-to-GDP ratio sharply higher to 121% in 2024.

Figure 7: Policymakers have routinely underestimated debt growth since 2009

Historical 10-year debt-to-GDP forecast, in %

Given these already high debt levels, we believe that the current pace of deficit spending is unsustainable in the long term, especially if interest rates remain elevated. While we think a debt crisis is unlikely in the near term, questions about debt sustainability are rising, further credit rating downgrades are likely, and the risk of a crisis will increase toward the end of the decade if fiscal deficits are not controlled (see Fig. 8).

Figure 8: US public debt trajectory on a worsening trend

US government debt-to-GDP vs. cost of debt to revenues, in %

The long-term path for US government debt

In its latest budget outlook released in June, the CBO projects wider deficits in coming years. Spending is expected to grow from USD6.8 trillion in 2024 to USD10.3 trillion by 2034, while revenues only grow from USD4.9 trillion in 2024 to USD7.5 trillion a decade from now. Consequently, the deficit is projected to grow from USD1.7 trillion to USD2.9 trillion in 2034, representing a 7% federal deficit-to-GDP ratio in 2034 (see Fig. 9). That would lead to an overall federal government debt-to-GDP ratio of 132% by the end of the decade, according to the IMF. These numbers may be conservative, for the CBO projections assume the average interest on debt held moves to only 3.5% over the next 10 years, and the agency does not yet consider any effects of new policies from the incoming Trump administration, as discussed above.

Figure 9: Projected deficits do not subside over the next decade

Government outlays, revenues, and deficits, in % of GDP

Advocates of more sustainable fiscal policy may call for aggressive spending cuts. But a deeper look into the government budget shows little low-hanging fruit. Mandatory spending, likely among the most politically intractable to reform and including programs like Social Security, Medicare, and Medicaid, makes up the bulk of government spending, totaling around 60% of the federal budget or about USD4 trillion in 2024 (see Fig. 10).

Figure 10: Discretionary spending too small to produce meaningful savings

Major US federal budget spending categories, 2024-34 estimates, in %

Defense spending, also unlikely to decrease under a second Trump administration, makes up 11%, and net interest payments take up 15% of spending. As such, 85% of the budget essentially cannot (or is at least very politically costly to) be touched. Everything else under the broad umbrella of ‘discretionary non-defense' spending sums up to another 15%, and would be an area to downsize but also includes items like foreign aid, disaster relief, and Pell grants.

Higher funding costs are a key challenge

In 2001, the US required just 7% of general government revenues to service its debt (see Fig. 11), when the debt-to-GDP ratio stood at just 53% of GDP. When the debt-to-GDP ratio peaked at 132% of GDP in 2020, low interest rates meant that debt service consumed only 6.7% of revenues. But, since then, US Treasury yields have increased sharply, and the rollover of existing debt into higher yielding bonds has nearly doubled the debt service burden.

Figure 11: Rising yields weigh on debt affordability

Cost of the US debt stock, in %

The average coupon of US Treasuries stands at 2.85%, while new debt has carried a weighted average yield of 4.3% over the past year. Further debt refinancing will therefore continue to add to interest expense as bonds mature. Excluding bills, the US will need to refinance USD 2.7 trillion of bonds (see Fig. 12) with a weighted average coupon of 2.5% through the end of 2025.

Figure 12: Maturing debt to be refinanced at higher interest rates

US Treasury debt maturity profile, in USD trillions

Source: Bloomberg, UBS, as of December 2024

Another factor pushing up debt service cost is the compensation investors received for holding Treasury Inflation Protected Securities (TIPS) when inflation was high. Depending on the future path of inflation, the USD2 trillion in TIPS could also add to debt service costs.

We expect the rise of the net cost of debt to government revenues ratio to slow in 2025. After rising from 11.9% to 13.2% this year, we expect it to reach 13.7% next year. Additional net cost of debt will result from the rollover of maturing bonds and the financing of the deficit, we estimate an extra USD40 billion and USD88 billion, respectively, and from lower Treasury holdings by the Fed, which pays out interest earned as a dividend to the Treasury. However, a lower cost of compensating holders of TIPS for realized inflation (which we expect to decline to 2.5% in 2025) and the rollover of Treasury bills should reduce the debt cost by about USD10 billion each. Overall, we expect the net cost of debt to grow by 8.5% (to USD1.25 trillion), while the denominator, general government revenues, should grow by 4.6% (to USD9.1 trillion), about in line with nominal GDP.

We estimate the net cost of debt to general government revenues currently stands at 13%, a doubling from 2020 levels. Thanks to continued disinflation, we expect the Fed to continue cutting interest rates toward 3.25-3.50% by the end of 2025 and for yields across the curve to decline moderately, which should help to stabilize the debt service cost below 14%. This, however, is still the highest level among developed countries (see Fig. 13), posing a meaningful fiscal burden that policy cannot immediately influence.

Figure 13: US spends highest share of revenues on interest

Net interest cost to government revenues, in %, 2024 estimate

How high can US government debt rise?

There is no strict limit on the amount of debt a government can carry, but the true “referee” on debt sustainability is the collective group of creditors, who determine the government’s effective cost of debt. As a country's debt burden grows, creditors may reduce their exposure or demand higher rewards. In turn, rising debt costs can consume more future revenues, which can be offset by spending cuts or increased revenues (also known as “fiscal austerity”) or by incurring more debt to pay interest (what Hyman Minsky called “Ponzi finance”). This latter strategy often leads to a debt crisis, where both debt levels and costs spiral upwards.

Some argue that the US may be ‘exceptional’ in its ability to run extraordinary deficits and levels of debt, given its status as the world’s leading economy and provider of the world's principal reserve currency. And it is true that a large, diversified, and resilient economy allows a country to carry more debt. Issuing the leading reserve currency also gives the US an advantage in selling bonds at affordable yields. US Treasuries serve as reserve holdings for many central banks, though some have recently increased their gold allocations at the expense of Treasuries.

Differences in wealth between countries and regions can also impact sustainable debt loads. According to the UBS Wealth Report, significant recent growth in US wealth to GDP means that average per capita US private wealth has increased to an estimated USD564 thousand, well ahead of USD 110 thousand average debt per capita (see Fig. 14). We examine how wealth might support future tax revenues in a later section.

Figure 14: US has high government debt, but also very high wealth per capita

Top 25 economies with highest wealth per capita, in USD, as of 2023 (per adult)

Economy	Economy	Wealth per capita	Wealth per capita
Economy	Switzerland	Wealth per capita	709,612
Economy	Luxembourg	Wealth per capita	607,524
Economy	Hong Kong SAR	Wealth per capita	582,000
Economy	United States	Wealth per capita	564,862
Economy	Australia	Wealth per capita	546,184
Economy	Denmark	Wealth per capita	448,802
Economy	New Zealand	Wealth per capita	408,231
Economy	Singapore	Wealth per capita	397,708
Economy	Norway	Wealth per capita	382,575
Economy	Canada	Wealth per capita	375,800
Economy	Belgium	Wealth per capita	362,408
Economy	Netherlands	Wealth per capita	361,759
Economy	United Kingdom	Wealth per capita	350,264
Economy	France	Wealth per capita	329,122
Economy	Sweden	Wealth per capita	319,289
Economy	Taiwan	Wealth per capita	302,551
Economy	Germany	Wealth per capita	264,789
Economy	Israel	Wealth per capita	260,567
Economy	Austria	Wealth per capita	255,689
Economy	Ireland	Wealth per capita	249,918
Economy	Korea	Wealth per capita	245,298
Economy	Spain	Wealth per capita	225,675
Economy	Japan	Wealth per capita	220,371
Economy	Italy	Wealth per capita	220,216
Economy	Qatar	Wealth per capita	199,430

But at the same time, no country has an unlimited capacity to carry debt, and past rating downgrades by S&P and Fitch to AA+ indicate that the US may have exhausted its extra debt capacity compared to other AAA-rated countries, which carry far lower debt ratios. For example, France, with a debt-to-GDP ratio 10 percentage points below the US and a net cost of debt of only 3.5% of revenues, saw Standard & Poor’s and Moody’s downgrade its debt one notch to AA- and Aa3, respectively, in 2024. Further fiscal deterioration in the US could lead to negative rating actions, albeit slowly, with one-notch cuts over several years.

Figure 15: US debt ratio in between France and Italy

General government debt-to-GDP, 2024 estimate, in %

How likely is a US debt crisis and what might it look like?

Creditors’ assessments are influenced by factors like the economic outlook, political stability, and geopolitical developments. Ultimately, these factors alongside investor confidence will determine when US debt becomes a serious problem. As such we must remain humble about predicting if or when the US debt situation will lead to a crisis.

However, we believe that growing US indebtedness increases the probability of creditors diversifying away from Treasuries, leading to higher yields at the longer end of the Treasury curve. When such pricing effects occur, debt concerns could spread to other asset classes. Higher USD bond yields affect the currency, interest rate-sensitive stocks, real estate, and some commodities.

In the event of a crisis of confidence in US debt, we would expect the Fed to act as the first line of defense, while the government would need more time to react with fiscal measures. While we believe US Treasuries will remain the lowest-yielding USD asset, extraordinary monetary easing, including bond purchases by the Fed, would weigh on the US dollar.

Pathways to a more sustainable deficit

At some point in the future, the US will need to bring its deficit down to a more sustainable level, whether by crisis, by choice, or through fortune. We do not think there should be a hard cap on fiscal deficits, as counter-cyclical swings are essential for smoothing the economic cycle. But incoming Treasury Secretary Scott Bessent has talked about a deficit of 3% of GDP as being desirable. So how might the US get there?

a. Productivity-led repair

Debt metrics are usually scaled to GDP, thus economic growth running faster than debt growth mechanically reduces a country’s debt burden over time. Such an outcome is possible. In 1998, President Clinton presided over the first budget surplus in decades as the economy enjoyed its seventh consecutive year of expansion and the Treasury coffers saw a windfall of revenue growth stemming from higher corporate and income tax receipts. Economists associate this period of above-trend productivity with the advent of the microchip and the expansion of computing power.

Is it possible that artificial intelligence and the associated investment also boost economic activity and improve the debt outlook over the next decade, much like technological advances did in the 1980s and 1990s? Assuming a “Roaring ‘20s” scenario of above-trend growth of US nominal GDP of 5% over the next decade (instead of subsiding to a longterm steady state of 3.8% as the CBO assumes) would shave a few percentage points off the projected debt-to-GDP path (see Fig. 16). This simple calculation assumes deficits are unchanged, but debt/GDP level will be less onerous with faster economic growth.

Figure 16: Faster nomial growth not a debt panacea

Debt-to-GDP forecast baseline versus "Roaring '20s" scenario, in %

b. Financial repression

Solutions to a US debt problem would likely also involve some elements of financial repression, measures to contain debt costs and help the debt stock rise by less than nominal GDP growth. Such measures would give the government time to rebalance fiscal budgets, ideally achieving an average deficit over the cycle that does not exceed average nominal GDP growth.

While not an explicit policy of the Fed or the US government, this is exactly what happened from 2021-2022 when the Fed’s zero-interest-rate policy and balance sheet expansion fueled artificially low bond yields at a time when nominal GDP growth was at or above 10%.

Financial repression can take various forms and historically, measures have been used in combination. They can include outright purchases in the bond market to suppress yields, regulatory measures to enlarge the group of captive buyers of government bonds (like banks, insurers and pension funds), and caps on interest rates that banks are allowed to offer on deposits.

c. Bond vigilantes force austerity

Unpopular paths to deficit reduction like tax increases or entitlement spending cuts are rarely chosen by politicians for obvious reasons. But higher borrowing costs can make previously unpalatable solutions a necessity, and many assume the US government will never have the political will to rein in deficits unless higher bond yields force the issue. As Clinton-era politico James Carville once said, “I would like to (be reincarnated) as the bond market. You can intimidate everybody.”

There are precedents in other regions, including "austerity" in the Eurozone following a sharp increase in borrowing costs in Greece, Italy, Spain, Ireland, and Portugal in 2011 and 2012. More recently, in 2022, higher bond yields led UK Prime Minister Truss to walk back plans to reduce taxes.

The Penn Wharton Budget Model published a study in 2023 that looked at three scenarios for slowing and stopping the steady increase in US government debt. One scenario involved a range of tax increases and spending cuts (without embarking on reform of entitlement programs or wealth taxes), including a 1.5% value-added tax, an end to itemized deductions, cuts to discretionary spending of 5% and reduced infrastructure investment by 10%. These measures produced a 10-year savings of USD5.6 trillion and stabilized the debt-to-GDP ratio at just over 100%, without inducing a recession (see Fig. 17).

Figure 17: Entitlement reform and austerity needed to stabilize debt

Debt-to-GDP ratio under different modeling assumptions, in %

A second Penn Wharton Budget Model scenario looked at reform of entitlement programs. Interestingly, the study suggests that raising the Social Security and Medicare eligibility ages would only result in limited incremental savings. Larger benefits would accrue from lifting payroll taxes to 14.4% from 12.2%, allowing Medicare to negotiate drug prices, and doubling the maximum earnings threshold for Social Security taxation. Like the austerity scenario, this approach leaves the economy unscathed and results in a stable debt-to-GDP ratio, but would be politically unpopular.

d. Wealth transfer

Finally, the study looked at options to stabilize the debt-to-GDP ratio through a range of revenue-raising measures focusing on taxing high earners and large estates. According to the Penn Wharton study, while lowering the estate tax exemption from USD11.7 million to USD 3.5 million would make little difference to revenues, a 45% federal tax rate on ordinary income, dividends, and capital gains for those earning more than USD1 million would drive a sizable increase in revenues, albeit still not enough to stabilize the debt-to-GDP ratio over time.

Conclusion

As President-elect Trump begins a second term, more attention is being paid to America’s fiscal health. Decades of deficits, and large stimulus packages following the 2008-09 global financial crisis and Covid-19 pandemic, have led US government debt to GDP to surpass 120%. Among developed nations, the US now has the fourth highest government debt-to-GDP ratio (behind Greece, Japan, and Italy), and interest costs consume the highest proportion of government revenues (13%) of any developed country. While there is no strict limit about how much debt the US—or any economy—can tolerate, the continuation of wider deficits that will increase the debt is unsustainable. Such a path will begin to constrain the US government’s ability to cushion the economy in case of future shocks and puts the value of Treasuries and/or the US dollar at risk in the long term.

We believe that the US government debt load can be manageable in the long run, provided nominal growth continues to run faster than the cost of interest. While higher economic growth and lower interest rates may help, some combination of financial repression, entitlement reform, and higher taxes will likely be required in the future.

Disclaimer

CIO research disclaimer

Get in touch

Together, we can help you pursue what’s important

Are you a client?

Become a UBS client

We’ll find a Financial Advisor for you

Skip Links

Read about our strength & stability

Insights to elevate your knowledge

UBS Billionaire Ambitions Report 2024

Search Title