US Debt Hits $40 Trillion Amid Rising Borrowing Costs and Deficits

US government debt reached $40 trillion in August, prompting debate ahead of next month's tight midterm elections about whether the United States is becoming a riskier borrower. So far, the United States does not appear to be becoming a riskier credit in financial markets. World bond markets are driving borrowing costs higher for all borrowers. Analysts say the US bond term premium, the return required for perceived borrower credit quality, does not appear to show worrying increases.

The Treasury reported on Friday a roughly $2 trillion budget deficit for the fiscal year ended September 30, 12% larger than the previous year's deficit. The fiscal 2026 deficit was the third largest ever and the biggest since the pandemic-era federal spending surge. Debt service costs reached a record $1.36 trillion. Government spending exceeded receipts by about 6.2% of the total economy. Analysts say a sustainable annual deficit, given typical economic growth, is around 3%. Deficits never fully retreated from pandemic levels because entitlement payments, tax cuts, increased military spending and, more recently, rising interest costs increased borrowing needs.

The $40 trillion debt includes obligations to government entities such as the Social Security Trust Fund. The government owes Treasury bond holders around $32 trillion, rivaling the size of the economy. The debt-to-GDP ratio is around 100%, a benchmark last seen during the financing of World War II. Economists are largely split on whether that ratio presents a problem and whether a tipping point exists. Economists say a US debt default is highly unlikely, although a default would shock the global financial system. Some Federal Reserve officials warn of an eventual fiscal reckoning whose severity would depend on economic growth and policymakers' response.

Analysts say risks remain partly because the Trump administration has not taken concrete steps to reduce deficits or curb rising borrowing costs. The administration says a promised economic expansion will prevent trouble from rising debt. Rising global bond yields force the United States to issue more debt each year. The United States competes for investment dollars with other stable countries and corporations funding artificial intelligence projects. Analysts say growth alone may struggle to break the cycle of higher debt, interest rates and borrowing.

Concord Action executive director Carolyn Bourdeaux said every candidate campaigning in 2026 should explain how the candidate would put the budget on a sustainable path. Bourdeaux warned that failure to act on fiscal issues would produce a fiscal crisis sooner than Washington appears willing to believe.

The administration says its sweeping tariff policy will help ease fiscal pressure. Trump's policy of taxing imports exposed exporters, importers and consumers to potentially higher costs. The tariffs initially generated tens of billions of additional dollars for the government. However, the Supreme Court struck down many of Trump's tariffs earlier this year, forcing the government to pay $145 billion in refunds and negating much of the additional revenue. The additional tariff revenue was itself a small fraction of the overall gap between spending and receipts. Federal Reserve officials have blamed recent inflation partly on Trump's import tariffs. The elections may determine tariffs' future, especially if Democrats take control of a congressional chamber and assert tax-levying and oversight powers.

US borrowing costs are rising despite Treasury Secretary Scott Bessent's efforts to contain borrowing costs. Bessent had identified the 10-year Treasury yield as a measure of Bessent's success, but the yield has risen. Some analysts predict an era of persistently higher interest rates. Freddie Mac reported that the rate on 30-year mortgages reached a recent high of 7.40% as the overall cost of credit rose. Mortgage rates of 3% were common in the 2010s.

The borrowing dynamics are increasing interest rates on home mortgages and other consumer loans ahead of the November 3 congressional elections. Polls show Republicans could lose control of the Senate and House of Representatives. Polls identify rising costs as voters' main issue.