The United States is facing a record-breaking national debt of $34.5 trillion, which is almost three times the debt of the entire eurozone. This staggering figure is equivalent to 122% of US gross domestic product (GDP), significantly higher than the eurozone’s 87%. According to the International Monetary Fund (IMF), this debt is projected to rise to 134% by 2029, indicating a worsening debt trajectory.
The US government’s deficit has also increased significantly in recent years, rising from 4.1% of GDP in 2022 to 8.8% in 2023, despite strong economic growth. This widening deficit is largely due to rising interest payments on the national debt, which are expected to climb to 3.2% of GDP by 2025.
The rising debt and deficit levels have sparked concerns among economists and investors about the potential for a fiscal crisis. These concerns were heightened by the recent downgrade of the US government’s credit rating by Moody’s from stable to negative, with a further downgrade possible in the next one to two years.
The IMF has warned that persistent inflation, exacerbated by loose fiscal policies, could complicate efforts to manage inflation and pose heightened global financial risks. While episodes of sovereign bond tumult are more common in emerging markets, they have also occurred in advanced economies, as evidenced by the events in the euro area a decade ago and more recently in the United Kingdom.
The US currently enjoys market trust in its ability to manage its fiscal policies effectively. However, this trust is not unconditional, and if lost, it could lead to severe financial repercussions. To mitigate the risks, the US government may need to consider significant reductions in major expenditures or increased taxes, although such measures may face political resistance.
