Goldman Sachs Warns U.S. Debt to Hit 120% of GDP, Interest Payments to Reach $1 Trillion

Goldman Sachs has issued a stark warning regarding the U.S. national debt, stating that President Donald Trump's spending plan will not prevent the debt from reaching unsustainable levels not seen since World War II. The U.S. is projected to pay $1 trillion in interest on its $36 trillion national debt next year, exceeding the amounts spent on Medicare and defense. This financial burden underscores the urgency of addressing the nation's fiscal deficits.

Economists at Goldman Sachs have analyzed the recently passed spending bill by House Republicans, noting that while it may slightly reduce the budget deficit when excluding interest payments, the overall trajectory of the total deficit remains unchanged. The primary deficit is significantly larger than usual for a strong economy, and the debt-to-GDP ratio is approaching post-World War II highs. Rising real interest rates are also contributing to a steeper trajectory for debt and interest expenses as a share of GDP.

The scale of future debt is heavily influenced by interest rate movements over the next few decades. Currently, the national debt stands at roughly 120% of GDP, with the Treasury Department borrowing more to meet the rising cost of servicing it. Interest payments on the debt are set to hit $1 trillion next year, making it the second-largest government expenditure after Social Security. If the debt continues to grow, interest expenses could become so large that stabilizing the debt-to-GDP ratio would require persistent fiscal surpluses, which are historically difficult to sustain due to economic and political challenges.

The Trump and Biden administrations responded to the COVID-19 pandemic with unprecedented spending, but the fiscal spigot remained open even as the economy returned to full employment. The nonpartisan Congressional Budget Office estimates that the GOP spending bill would increase deficits by $2.8 trillion over the next decade. However, the White House and some Republican lawmakers argue that this projection should not include the cost of extending Trump’s 2017 tax cuts, which are set to expire this year without the bill.

The crux of the $36 trillion debt problem is the uncertainty surrounding the level at which the debt becomes unsustainable. Treasury Secretary Scott Bessent has acknowledged a "spending problem" but not a "revenue problem." Gennadiy Goldberg, the head of U.S. rates strategy at TD Securities, agrees that the U.S. does not tax much compared to its GDP and government outlays, suggesting that either taxes must increase, spending must decrease, or a combination of both is necessary. However, this solution is politically complex.

Higher interest rates would exacerbate deficit pressures, and yields on long-term U.S. Treasury bonds have remained elevated as investors await a patient Federal Reserve to cut interest rates. Concerns about the growing deficit and potential inflation resurgence could continue to put upward pressure on rates. Fixed-income experts are also monitoring changes in foreign demand for U.S. debt, as rising trade and geopolitical tensions could undermine the dollar’s status as the world’s reserve currency, leading to higher borrowing rates.

Congress may eventually face tough choices regarding spending and taxes. Delaying action could force future lawmakers into a historic austerity push to avert disaster. In such a scenario, a large fiscal consolidation and persistent fiscal surplus could be self-defeating if GDP declines enough, preventing the debt-to-GDP ratio from shrinking. Politicians might also be tempted to print more money to pay government bills, a tactic that historically has led to economic malaise and social unrest, as seen in Germany’s Weimar Republic after World War I. However, this warning from history is not always heeded by governments.