THE US DEBT SERVICE COSTS ARE APPROACHING HISTORIC EXTREMES 💥

The share of the US federal budget absorbed by servicing Treasury debt is once again approaching levels not seen for decades. According to CBO estimates, net federal interest expenditure is expected to reach approximately $1 trillion, or 3.3% of GDP, in fiscal 2026. Interest costs have become one of the largest components of federal spending, ranking behind only Social Security and Medicare and already exceeding defence expenditure. In 2026, interest payments could absorb approximately 19% of total federal revenues.

The historical comparison is particularly interesting. During the 1980s and the first half of the 1990s, US net interest expenditure also hovered around 3% of GDP, while its share of federal spending reached approximately 14% in 1993. However, attributing the subsequent easing of America’s debt burden directly to the collapse of the Soviet Union would be an oversimplification: declining interest rates, smaller fiscal deficits and, ultimately, federal budget surpluses in the late 1990s played a considerably more important role. The combination of reduced borrowing requirements and cheaper debt servicing eventually allowed the interest burden to decline.

The challenge today may be considerably more difficult, because Washington is dealing simultaneously with an enormous stock of debt and a substantially higher cost of refinancing it. The CBO expects federal debt held by the public to stand at approximately 101% of GDP in 2026, while the budget deficit is projected at roughly $1.9 trillion, or 5.8% of GDP. Under current policy assumptions, debt is projected to reach 120% of GDP by 2036, with interest expenditure remaining one of the principal drivers of widening deficits. In other words, the government increasingly needs to borrow not only to finance current programs, but also to service the debt accumulated in previous years.

This raises the central question: how will the United States reduce this burden this time? The available options are limited — higher inflation that gradually erodes the real value of outstanding debt, lower Federal Reserve rates and refinancing costs, stronger nominal economic growth, higher tax revenues, lower government expenditure, or some combination of these measures. The most favourable outcome for Washington would be robust economic growth accompanied by gradually declining interest rates, but that becomes considerably harder to achieve while inflation remains persistent. If rates remain elevated for an extended period, the problem becomes increasingly self-reinforcing as older, cheaper Treasury securities mature and are replaced with new debt carrying substantially higher yields.

As for “breaking up the EU” as a solution to America’s debt problem, it is a striking geopolitical proposition, but economically it remains a speculative scenario rather than a credible mechanism. In theory, a severe European crisis could trigger a flight towards the US dollar and US Treasuries, temporarily increasing demand for American government debt and reducing Washington’s financing costs — one reason major global crises have historically supported US safe-haven assets. However, that would not resolve the underlying structural imbalance: current CBO projections suggest that net interest expenditure could rise to approximately $2.1 trillion by 2036. The principal risk to the United States therefore lies not in Europe, but in entering an era in which an ever-growing share of government revenue is required not to finance future economic development, but simply to service the debt accumulated in the past.

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