On Tuesday, voters in the US decided that the Democrats should control both chambers of Congress. When the new members take office in January, they will have gavels in both chambers, chairs of all committees, and access to investigative powers that they will no doubt use. They will also inherit more than $40 trillion of national debt, $32.7 trillion of which is held by the public, and a looming debt ceiling of $41.1 trillion. At today’s pace, we will reach that debt ceiling in the first half of 2027.
In October, the International Monetary Fund (IMF) warned that heavily indebted governments must confront their fiscal challenges before they become unmanageable. The IMF points out that the interest rate on government debt has been rising, meaning that governments will have to spend increasing amounts of money servicing the debt over time. Between February and September, the average 10-year government bond yield across the G7 rose by more than a full percentage point and is now at multidecade highs. For the US, specifically, the IMF found that “evidence shows that long-term forward rates have become more sensitive to projected government debt in recent years.” Bond markets are beginning to lose patience.
A one-percentage-point rise in bond yields doesn’t sound like much, but against the $32.7 trillion in debt held by the public, that eventually adds $327 billion per year in interest payments (though not all at once). Note that that is an additional cost, not the total. In 2026, the federal government spent $1.05 trillion on interest payments. If bond yields increase by another percentage point, we’ll owe $1.37 trillion in payments, and that’s assuming that the federal debt doesn’t increase further, which is a bold assumption.
For years, low interest rates made that borrowing seem cheap. In 2021, the Treasury paid just 1.6 percent on debt. Today, it pays 3.5 percent, and that figure is expected to rise in the coming years. And since the Treasury has been increasingly using short-term bills, the interest rate on our current debt will continue to rise. This is like signing up for an adjustable-rate mortgage knowing full well that rates will climb, and then continuing to pay the minimum payment every month.
The incoming majority’s early priorities suggest reducing the debt may take a back seat to new spending commitments. While campaigning on affordability, several of the Congresspeople-Elect have signaled a desire to restore the Affordable Care Act subsidies initially put in place during the pandemic. These subsidies were initially billed as “temporary,” in part because the pandemic was recognized as being temporary but also because a temporary spending measure receives a much lower cost estimate in federal budget projections. But as Milton Friedman used to say, “there’s nothing so permanent as a temporary government program.” Then there’s restoring the Medicaid cuts, which would cost around $880 billion over the next ten years.
To pay for all of this, there will no doubt be calls for higher taxes. The IMF itself says that countries facing high structural debt need to “strengthen tax systems” to reverse course. Some on the New Right have agreed that a “grand bargain” will have to occur that pairs higher taxes with promised spending cuts. While this is intuitively appealing, it runs into serious problems.
First, while Congress has the power to set tax rates, it does not have the power to set tax revenues. Since 1950, the top marginal income tax rate has fluctuated from over 90 percent to 28 percent. Over that same time span, federal receipts as a percent of GDP (that is, the revenue that is actually collected) have stayed remarkably steady around 17 percent. Given that top income earners subject to the highest marginal rate pay just under 40 percent of all income taxes received, we would expect far greater variation in federal receipts as income tax rates change. But as it turns out, when Congress raises rates, people change how and when they take their income. Higher statutory rates trigger behavioral changes that tend to return revenues to that average.
Second, the money that Congress collects is already spoken for with mandatory spending programs. Because these programs are “mandatory,” they lie outside the ordinary budget process. Spending on these programs grows each year automatically, without Congress or the president having a say, and can only be changed through new legislation on benefits or eligibility.
Given all of this, one must ask the obvious question: if debt is so expensive and getting more expensive by the year, why do governments around the world continue issuing debt? And the answer is remarkably simple: it makes for good politics. Federal spending today, even when financed by debt, delivers electoral benefits now and is concentrated on well-organized groups. Borrowing money imposes costs later, and these costs are spread among taxpayers who hardly notice the incremental change of each issuance of debt.
Within months of being sworn in, the new Congress will face its first budget battle. A Democratic Congress and a Republican president will have to negotiate over raising the debt limit that Congress sets for itself. The most likely outcome will be the same as we’ve seen before. First will come the theatrics, with each side rushing to cast the other party as the villain and itself as the hero. Then, at some point, both sides will raise the debt ceiling to accommodate the additional borrowing rather than actually do anything about it. Addressing the debt in our current system will likely take decades of concerted effort, which suggests that the problem is structural and not merely technical.
This is not how our fiscal house was initially set up. Until 1917, if Congress wanted to borrow money, it had to issue debt tied to a specific project. With that system in place, voters could assess Congress’s fiscal abilities much more accurately. Major programs, such as the Louisiana Purchase and the Panama Canal, were financed this way. The concept of a “debt limit” was initially implemented as a temporary means of expediting approvals during World War I. Today, it has far outlived its usefulness.
The IMF has issued a warning that the cost of waiting to get back on a path toward fiscal stability is going up. Bond markets are saying the same thing by expecting larger interest payments. The incoming members of Congress can change the incentives that got us to $40 trillion of debt. Alternatively, they can wait for lenders to force change upon them.
