On July 4, President Trump signed his \u201cbig, beautiful\u201d domestic policy bill, enacting a new wave of tax cuts estimated to add $3 trillion to $4 trillion to the national debt.<\/p>\n
While the national debt may be hard to conceptualize, economists say its explosive growth has the potential to have major impacts on the economy that will be felt even by individuals.<\/p>\n
\u201cI liken it to a boa constrictor squeezing its prey \u2014 the debt is slowly doing the same to the American economy,\u201d said Brett Loper, executive vice president of policy at the Peter G. Peterson Foundation,\u00a0which commissioned a number of recent reports on the national debt. \u201cThe squeeze comes in the form of slower growth, less job creation, higher costs of borrowing for consumers buying homes, or businesses investing in equipment. All of these are consequences.\u201d<\/p>\n
Learn more: 2025 housing market: Is it a good time to buy a house? <\/a><\/p>\n Apart from the tax legislation\u2019s predicted impact, the total debt has nearly tripled in the last 20 years<\/a>, from $12.26 trillion in 2004 to $35.46 trillion in 2024, per data from the U.S. Treasury. A slow and steady rise began in the 1980s and was accelerated by the 2008 financial crisis and Great Recession after a period of relative stagnation post-World War II. At the same time, the debt-to-GDP ratio, comparing the size of the debt to the U.S. gross domestic product,\u00a0has continued to grow, first reaching 100% in 2013 and up to 123% last year. The ratio had not ticked above 100% since right after World War II<\/a>.<\/p>\n The total amount the U.S. government is spending on interest has also continued to make up a bigger percentage of overall expenditures, from 8% in fiscal year 2019 to 13% in FY 2024, per numbers from<\/a> the U.S. Government Accountability Office. In 2024, net interest was the third-largest federal spending category, at $881.7 billion, after Social Security and other federal healthcare.<\/p>\n To put it in simple terms, the U.S. national debt is the difference between the amount of money the federal government is bringing in through taxes and other revenue versus the total amount of budgeted federal spending, in addition to deficits from previous years, said Steven Kyle<\/a>, associate professor of applied economics and management at Cornell University.<\/p>\n Part of the increase in recent years is attributable to the COVID-19 pandemic, which ushered in a variety of special spending, as well as the regular drivers, including entitlement programs like Medicaid and Medicare, defense spending, and high interest on the debt itself,\u00a0said University of Pennsylvania Wharton School professor of finance Itamar Drechsler<\/a>.\u00a0Increasing costs to maintain Medicare and Social Security, due to an aging population and the rising price of healthcare, have also helped drive up the national debt.<\/p>\n While much has been made about the debt-to-GDP ratio in recent years, Kyle notes that there’s no exact percentage that indicates instability. Japan\u2019s ratio, for example, was at almost 250% in 2023<\/a>, yet that nation is not considered to be in an insecure economic position.<\/p>\n \u201cThere is no magic level for that number that means a crisis,\u201d Kyle said. \u201c… The problem we\u2019re having right now is that people are doubting that the economic managers of the United States are serious people and that they\u2019re actually trying to address this.\u201d<\/p>\n What is clear, according to Kyle, is that one way to address an increase in government spending would be a boost in revenue through higher taxes. But in this current political atmosphere, that almost certainly won\u2019t happen.<\/p>\n \u201cOn the revenue side, one where you are not allowed to utter the word tax, we have not been getting the revenue we need to cover the gap,\u201d Kyle said. \u201cAnd, therefore, we\u2019ve been accumulating national debt in good times and bad.\u201d<\/p>\n While what Kyle calls the \u201chuge borrowing spree\u201d of the pandemic was largely \u201cunavoidable,\u201d the last few years could have been used to right the financial ship.<\/p>\n The national debt is projected to top $52 trillion by 2035, according to the Congressional Budget Office \u2014 an estimate reached before Trump\u2019s tax cuts were enacted<\/p>\n Using a 2055 scenario in which the debt-to-GDP ratio is at 156%, the Peterson Foundation published an analysis which found that the current path of debt<\/a> could reduce the size of the economy by $340 billion in 2035, shrink the number of U.S. jobs by 1.2 million, and bring wages down by 0.6% relative to having an unchanged national debt.<\/p>\n A 2025 Yale Budget Lab report<\/a> showed that a permanent deficit increase of 1% of GDP would lead,\u00a0after five years, to consumers paying $60 more in annual auto loan interest, $600 more in annual mortgage interest, and about $1,000 more for small business loan interest. The general tone of a continually rising national debt and debt-to-GDP ratio is some level of doom.<\/p>\n \u201cWhat happens when everybody gets nervous?\u201d Kyle said. \u201cConsumers don\u2019t buy things, investors don\u2019t invest in new productivity capacity because they don\u2019t know what their profit margin is going to be next year. We get a recession, and that can affect people.\u201d<\/p>\n Read more: How to recession-proof your money<\/a><\/p>\n Here are some other specific ways individuals could be impacted by rising national debt.<\/p>\n Depressed wages and jobs<\/strong> <\/p>\n According to the Peterson analysis, the number of U.S. jobs could decrease by as much as 1.2 million in 2035 and 2.7 million in 2055 based on the projected trajectory of the national debt compared to if it were to stay at its current level.<\/p>\n This could also lead to a decrease in wages as high as 3% by 2055. Essentially, a rising federal debt means the opposite of wage growth.<\/p>\n One of the simplest ways to reduce the national debt is by increasing government revenue, and that is largely done through higher tax rates.<\/p>\n \u201cUnless we have miraculous growth, that tax rate will have to rise on people,\u201d Drechsler said. \u201c… But it\u2019s becoming increasingly toxic to ever talk about raising them, so in this political climate, I\u2019m not sure it\u2019s going to happen anytime soon.\u201d<\/p>\n Whenever economists talk about economic growth, or a lack thereof, interest rates are generally the metric that follows. Higher interest rates determine who can buy property and cars and invest in a business.<\/p>\n Learn more: When will mortgage rates go down? <\/a><\/p>\n \u201cIf [government debt] gets bigger and bigger, interest rates are going to be going up, because deficits are a direct stimulus to the economy. If they run huge budget deficits, then the Federal Reserve will raise interest rates to keep inflation in check,\u201d Kyle said. \u201cThere\u2019s only a certain amount of money looking for a home to be invested in and if the federal government soaks up ever more of it, consumers will feel that.\u201d<\/p>\n The Yale Budget Lab found that after 30 years with a 1%-of-GDP permanent increase in the federal deficit annual car loan interest would increase by $200 and annual mortgage interest on the median home by $2,300.<\/p>\n Increased inflation is also a likely facet of a U.S. economy with an increasing national debt. The same Yale Budget Lab study noted that a deficit increase of 1% of GDP would raise inflation to the degree that, after five years, a household would lose $300 to $1,250 in purchasing power in 2024 dollars.<\/p>\n Read more: What is inflation, and how does it affect you? <\/a><\/p>\n