The drip-drip US debt crisis

Financial Times Europe26 Aug 2026Chris Giles chris.giles@ft.com

Make no mis take, the US is suf fer ing a debt crisis. It is, of course, not an acute emer -gency like Argen tina’s mul tiple defaults this cen tury or Greece’s woes in the 2010s,but it has the char ac ter ist ics of a chronic dis aster that every one can see com ing butthe admin is tra tion never does enough to avoid.

The most rel ev ant meas ure of US fed eral gov ern ment debt, that held by the pub lic,has risen from $3.4tn in 2000 to $32.3tn now, or a rise from 33.7 per cent to morethan 100 per cent of GDP in just over 25 years. More import antly, the bur den of ser -vi cing that debt has doubled, from 11 per cent of tax rev en ues in 2000 to 21.5 percent in the first 10 months of the cur rent fiscal year. Because long-term bor row ingcosts are high, the US Treas ury is increas inglyfin an cing the debt with short-termbor row ing and the pres id ent is again pres sur ing the Fed eral Reserve to cut interestrates to make the num bers look bet ter. This is the slip pery slope of a slow burn debtcrisis.

With the US on a path to con tinue run ning defi cits close to 6 per cent a year, even atfull employ ment, the debtto-GDP ratio is set to rise every year, increas ing the call ontax rev en ues to ser vice that debt and the pres sure on the Fed to lower interestrates. The like li hood is not that this pro cess ends in default or run away infla tion,but an ever-worsen ing prob lem for someone in future to solve. As I recentlyargued, rising defi cits and debt-ser vi cing costs no longer have the power to restorefiscal prudence.

Before examin ing solu tions, it is worth ask ing why the US fiscal pos i tion has deteri -or ated so much this cen tury. Since 2000, when the fed eral gov ern ment ran a sur -

plus of 2.3 per cent of national income, primary pub lic spend ing (exclud ing net debtinterest) has risen from 15.5 to 19.9 per cent of GDP. All of this increase can beaccoun ted for by spend ing on ser vices for an age ing pop u la tion — social secur ity,Medi care and vet er ans’ pro grammes.

On the tax side, rev en ues have fallen from 20 per cent to 17.2 per cent of GDP overthe same period, partly a res ult of a cyc lical peak in rev en ues at the end of the lastmil len nium and partly the res ult of tax cuts. First came the Bush tax cuts, whichwere made per man ent on a mostly bipar tisan basis dur ing the Obama admin is tra -tion, and then came the 2017 Trump tax cuts. The Centre for Amer ican Pro gressestim ates that had the 1990s tax sys tem remained intact, US pub lic debt would bestable now, with a pro spect of it declin ing in the dec ades ahead.

In the face of the fun da mental longterm forces of rising age-related spend ing andunaf ford able tax cuts, the inad equate recent response from the US admin is tra tionhas been a com bin a tion of bluster and panic.

Last week, Treas ury sec ret ary Scott Bes sent prom ised again to focus on defi citreduc tion, but his talk has lost any cred ib il ity at this stage. Sig ni fic ant spend ing cutswere attemp ted by the now dis ban ded Depart ment of Gov ern ment Effi ciency andfailed, while Don ald Trump’s One Big Beau ti ful Bill Act spent the money raised bytar iffs and no other tax increases are planned.

Where Bes sent has taken steps to lower US gov ern ment bor row ing costs, such aspro pos ing to swap a tiny slice of long-dated US debt with short-dated equi val ents,they have been small, giv ing a sense of someone with few options. Hav ing prom ised3 per cent annual growth and a 3 per cent defi cit, Bes sent’s cur rent record stands atroughly 2 per cent and almost 6 per cent respect ively.

Faster growth would help with tax rev en ues, but would also prob ably increaseinterest rates, so the US has no sure-fire means of escap ing its drip-drip debt crisiswithout sig ni fic ant spend ing cuts or tax increases. It does not need to elim in ate thedefi cit, but does need to put debt back on a down ward path, which almost cer tainlyrequires a bal anced primary defi cit — a met ric that excludes net interest costs —something the US has not achieved since 2007 and not on a sus tained basis since the1990s.

Since cut ting spend ing on pen sions and health care for the eld erly is diffi cult andundesir able, this and future US admin is tra tions should look at rais ing rev en ues inthe least dam aging way. The US has sig ni fic antly cut tax rates for the richest thiscen tury, so some reversal of those would be likely and jus ti fied from a left-lean ingpres id ent and Con gress. But a valu able exer cise in tax options and trade-offs, pro -

duced by the Tax Found a tion, high lights the poten tial sig- nific ant costs to growthand effi ciency from nar row meas ures such as wealth taxes and tar iffs. Its ana lysissug gests, not unreas on ably, that broad rises in taxes on income or spend ing are bestfor rais ing large amounts of rev enue to fund broad-based gov ern ment pro -grammes.

Other coun tries with sim ilar diffi culties would require dif fer ent rem ed ies. With itsalready high levels of tax a tion and healthy pop u la tion that retires early, Franceneeds first to encour age later retire ment by cut ting entitle- ments. The UK, whichhas already increased taxes sharply on those with high incomes, needs to ensurerev enue rais ing is widely applied.

Mean while,fin an cial mar kets are look ing to the US for lead er ship, but it is absent.The instinct of this admin is tra- tion is to seek to talk its way out of its debt crisisrather than address the issues. While it denies there is a prob lem and tinkersaround the edges, the drip- drip debt crisis will con tinue to build.