CBO Director Warns Debt Will Surpass WWII Levels, Interest Rates To Spike | Phillip Swagel

Debt held by the public as a share of GDP is projected to continue rising indefinitely under current law, unlike the post-World War II period when high debt was paid down over decades by the generation that fought the war.

“It's that is the challenge. And this is the I mean, this is a stocks. This is the the um debt held by the public as a share of GDP. And you can see it just keeps going. And compare it to what happened in the 1940s. So you can see of course, we had a you know, World War II in um in the 1940s, the debt rose as you know, the US government borrowed. This is a you know, sort of you know, all these famous posters of um you know, buy war bonds. And then the debt was paid off in in large part by the generation that fought the war. And now the greatest generation. And now we see that on the the right-hand side of the screen the debt ratio, exactly. Yeah, thank you where you're pointing. The debt ratio going up. Um and and not coming back down.”

This debt-to-GDP trajectory is unprecedented for the United States, but other G7 nations like Japan and Belgium also have high debt-to-GDP ratios; Japan's high debt correlates with decades of slow growth, which is probably partly attributable to the debt ratio.

“This is unprecedented for the United States in terms of how far the debt to GDP uh will climb. However, we can look at other G7 nations, perhaps at Japan as maybe a proxy to see how their economy performs under such high debt loads.”

The United States has special structural advantages (the dollar's role as the world's reserve currency, ability to borrow in its own currency) that mean a debt crisis is unlikely in the near term, but these advantages do not mean the fiscal trajectory can continue indefinitely without consequences.

“the US is remains a special economy. I mean, the the dollar has a special place in the world um economy and financial system. So we have some advantages. That's why you know, we're continuing to um indicate that the debt is not sustainable. But it's not that there's a crisis tomorrow or the next day or anytime soon. It's What what what we mean is that action needs to be taken to to change the fiscal trajectory. But it's not it's not that it has to be done at any one moment. It just has to be done over time.”

If the US government and Federal Reserve were to monetize the debt (create new money to purchase existing debt), it would result in high inflation, which is effectively a soft default because the government pays back debt in dollars that are worth less.

“If the government of the central bank were to monetize the debt, meaning they were to create new money to purchase uh existing debt, uh would that solve the problem? I mean, it would result in high inflation. Right? That would be um in some sense, it's almost like a form of a soft default. Right? The US is paying back the debt, but paying back in dollars that are worth less.”

The CBO makes economic projections for GDP and growth because they need projections for the economy to project outlays and revenues, since stronger economic growth increases tax receipts and reduces means-tested spending (unemployment, SNAP benefits), while weaker growth does the opposite.

“it's the challenge of the job. Exactly you said. We have to have a projection for the economy in order to do our other projections of outlays and revenues. And revenue is natural, right? That that, you know, where the economy goes drives um the receipts that the federal government takes in. But there's also spending that is geared to the economy. If the economy is strong, well then there's certain means-tested uh spending that will be lower. There'll be fewer people unemployed. There'll be fewer people um getting food what used to be called food stamps, now SNAP benefits, supplemental nutrition assistance program benefits.”

Rising interest payments on the debt will crowd out other government spending priorities such as Medicare, Medicaid, and Social Security unless the government cuts spending on those programs or raises taxes to increase revenue.

“that that's really the challenge that you put your finger on. That is that um the rising interest payments such as crowd out other priorities. Um and and crowded in the sense of policy makers have to consider the overall fiscal picture. Um and dollars going to one thing can't go to another thing. And so either we need, you know, lower spending on other things or higher taxes and more revenue.”

Net interest payments alone are projected to hit $1 trillion this year and double to $2.1 trillion by 2036.

“Net interest payments alone are projected to hit $1 trillion this year and double to $2.1 trillion by 2036.”

Deficits can cause inflation, but the relationship depends on the interaction between deficit levels and monetary policy response.

“deficits can cause inflation, but it depends on the interaction with monetary policy.”

Interest payments on the debt have already risen 8% year-over-year through February 2026.

“And so your February 2026 outlook projects that net interest payments will rise from 1 trillion roughly 1 trillion dollars this year to 2.1 trillion dollars by 2036. Uh that's rising from 3.3% of GDP to 4.6%. In your monthly budget review, it shows interest costs rising already 8% year-over-year through February.”

In the CBO's own words, the fiscal trajectory is not sustainable.

“In the CBO's own words, the fiscal trajectory is not sustainable.”

The Supreme Court struck down the IEEPA tariffs on February 20th, and the CBO estimates that this ruling could add $2 trillion to projected deficits over the next decade.

“The Supreme Court struck down the IEEPA tariffs on February 20th, and the CBO estimates that this ruling could add $2 trillion to projected deficits over the next decade.”

The 2025 reconciliation act increased deficits by $4.7 trillion over the 10-year budget window, while tariffs reduced deficits by $3 trillion, resulting in a net deficit increase of approximately $1.7 trillion.

“the 2025 reconciliation act increased deficits by 4.7 trillion.”

Swagel explicitly declines to use the word 'insolvency' to describe the US fiscal situation and prefers characterizing the trajectory as 'challenging, daunting, and unsustainable,' arguing that markets implicitly believe the nation will take action to address the challenge.

“Well, so uh first of all, I would follow the Treasury and I would not use that word. Um I the fiscal trajectory is challenging, it's daunting, it's unsustainable. Markets clearly believe that we as a nation will take action to address this challenge and the Treasury the Treasury Secretary has talked about taking action”

The national debt crossed $31 trillion on March 17th, 2026, just 5 months after hitting $30 trillion, and is growing at roughly $7.2 billion per day.

“The national debt crossed $31 trillion on March 17th. The national debt crossed $31 trillion on March 17th, just 5 months after hitting $38 trillion, and it's growing at roughly $7.2 billion per day.”

The Pentagon is seeking $200 billion in supplemental war funding on top of the $150 billion Congress already gave the Department of War in last year's reconciliation act, none of which is reflected in the CBO baseline yet.

“The Pentagon is seeking $200 billion in supplemental war funding on top of the $150 billion Congress already gave the Department of War in last year's reconciliation act, none of which is reflected in the CBO baseline yet.”

The 10-year Treasury yield has climbed to roughly 4.42%, up almost 12% since the Iran war began on February 28th.

“the bond market is already starting to reflect higher government outlays, with the 10-year Treasury yield climbing to roughly 4.42% up almost 12% since the Iran war began on February 28th.”

Economists like Steve Hanke and David Walker have written that the CBO's projections of 50 to 70 trillion dollars in unfunded obligations over the next 30 years (excluding Social Security and Medicare) constitute insolvency under any standard accounting framework.

“The projections of the CBO have put out have caused a lot of concern in the economic community. Um This is just an ex post that I saw today. Uh negative uh numbers exclude Social Security and Medicare. CBO projects um at another 50 to 70 trillion dollars in unfunded obligations over the uh over the next 30 years. Um economists like Steve Hanke and David Walker, Steve Hanke is a regular on my program, wrote in Fortune on March 23rd that these numbers constitute insolvency under any standard accounting framework.”

The CBO recognizes there will be both disruptions and new opportunities from AI, including new jobs and occupations not yet contemplated, but lacks a sufficient basis to quantify these disruptions and opportunities in projections.

“Then there's the changes and disruptions and opportunities. And there's going to be new um you know, new jobs and new occupations and things that we don't even contemplate. I mean, who who would have thought of a podcaster 30 years ago, right? I mean, there was radio shows and now like news radios are shutting down and podcasters are taking over. So, um yeah, so we're watching that. We know there's going to be both positives and disruptions, but we don't have This is we just don't have a basis yet for um for that.”

A slow undermining of shared prosperity through higher interest rates, inflation, and a weaker dollar would result from persistent fiscal unsustainability, rather than a sharp cliff-like collapse.

“it would be a slow undermining of our shared prosperity. If the government of the central bank were to monetize the debt, meaning they were to create new money to purchase uh existing debt, uh would that solve the problem? I mean, it would result in high inflation. Right?”

The CBO does not recommend particular solutions to fiscal policy problems, but instead indicates that action is needed and supports Congress as they decide what to do.

“From CBO, we don't recommend particular solutions to policy makers. We don't say do this or do that. But you know, we just say some action needs to be taken and then we support the Congress as as they decide what to do.”

AI is making the economy more productive, and using AI tools (like research agents) can enhance human judgment rather than replace it, similar to how AI can help identify questions while humans provide judgment on what is the right question to ask.

“I'm positive. I'm pretty optimistic about the economy. Um in you know, recognizing the disruptions, but I you know, AI is making us more productive. And that's what I would see right for your like your research, you'll have an AI agent helping you with your research and identifying questions. You still need to use your judgment, okay, what's the right question and what, you know, what's the right follow-up. And it's the same thing. We're, you know, we're trying to figure out how to use this best.”