US national debt exceeds US$40 trillion for first time

The United States has surpassed a national debt of US$40 trillion for the first time, according to government data released on Wednesday. This staggering figure exceeds earlier predictions and has surged due to a combination of factors, including President Trump's invalidated tariffs. The growth in borrowing is further exacerbated by increasing obligations for social security and healthcare, as well as rising interest payments.

At the close of business on Tuesday, the total public debt outstanding stood at US$40.05 trillion, according to the Treasury Department. This figure surpasses the earlier forecast by the Congressional Budget Office, which had predicted borrowing would reach US$39.4 trillion by the end of fiscal year 2026.

The rise in US debt coincides with growing concerns over inflation, the ongoing war in the Middle East, and government spending, which have instilled investor worries. Consequently, the cost of borrowing has increased, with yields on long-term Treasury bonds reaching their highest level since 2007. This has forced the US government to refinance debt at the highest rates since before the 2008 global financial crisis.

However, the Treasury Department attempted to stabilize the long-term bond market early on Wednesday, causing yields to drop once again. The federal government operates at a deficit and borrows money to cover its obligations, including war spending and tax cuts. Jessica Riedl, a budget and tax fellow at the Brookings Institution, noted that the US government has been on a precarious path of deficits for some time, with deficits reaching roughly US$2 trillion even during periods of peace and prosperity.

While deficits of three percent to four percent of GDP used to raise concerns among financial markets, the current levels are closer to six percent to seven percent of GDP, raising nervousness in the markets. As inflation pushes interest rates higher, the cost of debt has also risen. Additionally, demographic factors, such as an aging population, are contributing to increased deficits.

Analysts caution that while there is no specific debt-to-GDP level that automatically triggers a crisis, debt held by the public is considered the most economically meaningful measure. Nonetheless, psychologically, these thresholds serve as warning signs for financial markets, prompting them to reevaluate the rising debt levels.

Federal borrowing has surged during the Great Recession of 2007-2009 and has continued to increase following the government's response to the downturn triggered by the Covid-19 pandemic. However, Caleb Quakenbush, director of fiscal policy at the Bipartisan Policy Center, expressed concern about the lack of meaningful action from Congress or US administrations to address the trajectory of US budget spending.

The uncertainty surrounding the unprecedented levels of borrowing has raised apprehensions about potential challenges for bond markets. Even outside crisis situations, higher borrowing costs for consumers and businesses could squeeze the economy. Treasury Secretary Scott Besse had previously set a goal of reducing the US deficit to three percent of GDP.