A grim new milestone for U.S. debt and surging interest rates haven’t sparked much urgency for a new round of deficit cutting on Capitol Hill. Yet.
But with federal debt topping $40 trillion for the first time last month, lawmakers will likely have to lift the $41.1 trillion statutory debt ceiling within the next year or so. That task usually involves a debate over curbing deficits, even if the default in recent years has been to do little to nothing.
Some Republicans have floated raising the debt limit as soon as the post-election lame-duck session through budget reconciliation, a hard-enough lift even at a simple-majority vote threshold. A flip in party control of either chamber in November effectively removes reconciliation as a tool lawmakers can use next year for a debt-limit bill that wouldn’t require 60 Senate votes.
That would leave a bipartisan agreement as the only path forward short of eliminating the legislative filibuster, which so far neither party has shown an appetite for. But with few exceptions, both parties have generally retreated to familiar talking points only palatable to their own sides when it comes to cutting deficits.
For Republicans, it’s spending cuts without touching Medicare and Social Security benefits; for Democrats, it’s raising taxes and increasing spending — except for defense, which many in that party believe should be cut.
Both sides have become “populist parties,” former Speaker Paul D. Ryan, R-Wis., said Thursday on CNBC. “And populists believe things like debt reduction, entitlement reform is unpopular. Therefore we don’t have anything close to the politics we need to get this stuff done.”
Debt limit ‘weapon’
The most bipartisan idea when it comes to the debt limit may be to remove it completely as a leverage point, given the economic fallout that could ensue if Congress doesn’t act in time to raise or waive the ceiling.
Breaching the limit would mean massive, immediate spending cuts and unpaid interest on the debt — which would be perceived by much of the world as an unprecedented “default” on U.S. obligations, making it harder to borrow in the future. Stock markets could crash.
President Donald Trump as well as top Democrats have mused about eliminating the debt limit altogether or at least giving it a radical makeover.
The top Democrats on the House and Senate Budget panels introduced bills last year that would allow the Treasury secretary to suspend the debt limit for up to two years at a time unless Congress clears — and the president signs — a filibuster-proof joint resolution of disapproval.
In an interview, House Budget ranking member Brendan F. Boyle, D-Pa., who’s in line to chair that committee if Democrats take control in the midterms, said he’d insist on his proposal or similar as part of any debt-limit increase.
Boyle (Bill Clark/CQ Roll Call file photo)
“At the very least we need to make sure that we take this powerful weapon permanently off the table,” Boyle said, citing past debt-ceiling episodes where Republicans tried to extract big spending cuts as their price for raising the cap.
“I’m not going to just vote for a temporary … extension so that then the next time there’s a Democrat in the White House, Republicans can again cynically use the debt ceiling,” he said.
Unwelcome records
The current $40.1 trillion national debt includes about $7.7 trillion held in trust funds for Social Security, Medicare and other government programs. It also includes about $4.6 trillion in debt held by the Federal Reserve.
The remaining $27.8 trillion is held by private and foreign creditors, reflecting the portion most exposed to interest-rate risk from a potential selloff. That number is equal to about 86 percent of the U.S. economy, and is projected to hit 100 percent within a decade, breaking the World War II-era record.
Net interest paid on that debt, already more expensive than national defense, is projected to top $1 trillion this year, eating up nearly 19 percent of federal tax revenue, also a record. The Congressional Budget Office says those figures will hit $2 trillion and 25 percent within a decade.
And current CBO estimates are from February, before the Iran war and higher oil prices sparked more inflation generally. Higher prices drive bond yields up as fixed-income investors demand inflation-adjusted returns.
Other factors have driven up interest rates, including demand for corporate bonds to finance data centers and concerns about the Fed’s willingness to combat inflation. But a key element is an unsustainable U.S. fiscal trajectory, according to Ryan Kimmel, an asset allocation strategist at fund manager DoubleLine Capital in Los Angeles.
The combination drove the 30-year Treasury bond rate to 5.3 percent in mid-August, highest in nearly two decades, while 10-year and 3-month debt is trading at yields well above CBO expectations.
“If you change any of those assumptions like higher interest rates … you could get into scenarios where you’re seeing like a third of tax revenue going to debt service costs,” Kimmel said. “And you can get yourself into this negative feedback loop where a smaller and smaller share of your tax revenues are going towards discretionary and other mandatory spending.”
Meanwhile, by 2034 the Social Security and Medicare trust funds are projected to run out of money to pay full benefits, with the program’s actuaries predicting steep Social Security cuts as soon as 2032 if Congress doesn’t act.
The worsening fiscal outlook isn’t new. But the accumulation of debt and higher interest rates are “starting to scare people,” said Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget.
“I think it is making a difference in how people are thinking and talking about this,” he said.
Rep. Lloyd K. Smucker, a top candidate to lead House Budget Republicans in the next Congress, cited bond market “turmoil” as a reason lawmakers should slow the growth of debt when raising the borrowing ceiling.
“I think more and more people are realizing that it’s just simply unsustainable going forward,” Smucker, R-Pa., said.
Boyle agrees, though he blames it primarily on GOP tax cuts dating back to the George W. Bush administration.
For now, the bond market is taking increased debt “in stride,” Kimmel said, compared with the 1990s when interest rates were generally much higher and creditors forced lawmakers into several major deficit-reduction deals.
‘Extraordinary measures’
Congress last raised the debt limit little more than a year ago, by $5 trillion in the 2025 reconciliation law.
Once the new $41.1 trillion cap is reached, the Treasury Department can typically buy at least a few extra months by deploying emergency cash and “extraordinary measures” like suspending certain trust fund investments.
Since the CBO’s February forecast, federal revenue has been coming in below expectations after the Supreme Court ruled that broad uses of the president’s executive powers to levy tariffs were illegal.
Lou Crandall, chief economist at investment adviser Wrightson ICAP, in a “very much off-the-cuff” guess, projects the debt could hit the limit around February or March with the “x-date” falling in late 2027 or early 2028.
Trump has called on lawmakers to raise the debt limit before the end of this year, punting the next x-date until at least after he leaves office.
But Republicans’ “reconciliation 3.0” effort does not include the debt limit, as GOP leaders want to keep the package narrowly focused and limit defections. There’s talk of a lame-duck “reconciliation 4.0” package which could include the debt ceiling, though that would be an even heavier lift.
After the elections, some Republicans will be retiring, and others may lose and blame their loss on Trump, making them disinclined to support the president. Another challenge would be getting conservatives and moderates on the same page.
On the other hand, Republicans could decide they are better off raising the debt limit in the lame-duck session, while they are still in the majority.
“It’s possible that losing the House or Senate will crystallize things and will get Republicans to move and put in a reconciliation bill along with Iran aid,” said Don Schneider, deputy head of U.S. policy at Piper Sandler, an investment bank.
But he was skeptical that Republicans would be able to act on the debt limit this year.
“Trump wants it done, but he is going to have to take the lead in forging consensus and urgency around it,” said Schneider, a former House Ways and Means GOP aide.
Bipartisan buy-in?
If not, Democrats are providing a taste of what’s to come on fiscal policy next year if they take control.
House Minority Leader Hakeem Jeffries, D-N.Y., said his party would seek to undo the 2025 reconciliation package’s Medicaid cuts and renew expanded Affordable Care Act tax credits. Other Democrats would go further and enact “Medicare for All.”
Senate Budget ranking member Jeff Merkley, D-Ore., in an MS Now op-ed, pitched eliminating the cap on wages subject to Social Security payroll tax. He’d also subject investment income earned by the “wealthy” to Social Security tax; repeal the 2025 GOP tax cuts; enact a tougher Medicare price negotiation program; cut payments to Medicare Advantage plans and slash the defense budget.
Most of these proposals are unlikely to gain bipartisan traction, although raising or eliminating the Social Security tax cap has gotten some modest bipartisan buy-in, including from Smucker and Sen. Bernie Moreno, R-Ohio.
Moreno (Tom Williams/CQ Roll Call file photo)
The looming Social Security cuts are one tangible impact of the deteriorating fiscal outlook that’s starting to get lawmakers’ attention. But it’s not clear they are close to any sort of consensus.
“The challenge here is to find a way to make good on the promises to people who have been paying into the system,” Smucker said, “but also recognizing that we have a serious math problem.”