The U.S. government’s debt recently hit $40 trillion. Beyond the shock value of a number so large, what does that actually mean for your economic life? Were you getting along fine when the debt was $39 trillion?
It matters because persistent deficits and rising borrowing costs are fueling the affordability pressures households feel every day.
Think of the debt as water in the tub and the annual deficit as the flow from the faucet. Of that $40 trillion, $32 trillion is held by investors here and abroad who buy our bonds; the $8 trillion difference is held in government trust funds. That public debt is about equal to 100% of U.S. gross domestic product, a near threefold increase over the past two decades.
The war with Iran adds to the fiscal pressures, but the deeper problem is that we have, for years, been running recession-level deficits in good times and bad. It’s one thing to borrow historically large amounts in the face of an existential threat. After all, the U.S. hit its highest debt on record, 106% of GDP, following World War II. But heavy, routine borrowing is an entirely different scenario — a bad one.
This fiscal posture most directly affects everyday Americans through higher interest rates.
Long-term rates reflect many forces including inflation expectations, priorities of the Federal Reserve, global demand for safe assets, and investor confidence. But massive federal borrowing is an increasingly large part of the story.
The 10-year Treasury yield has crossed 5% for the first time since 2023, up a full percentage point since the war with Iran began in late February. Mortgage rates followed, climbing from just under 6% to above 7%.
That increase is costly. On a $400,000 mortgage, the difference between a 6% and a 7% rate is $265 per month — more than $3,000 per year, about what a typical household spends annually on gasoline. That helps explain why home sales have slowed to rates unseen since the housing crash, leaving many young families stuck as renters. The same arithmetic strains car loans, credit cards, and the loans small businesses need to expand and hire.
Higher rates also increase the government’s own borrowing costs, putting more pressure on the federal budget. When debt is high, even modest rate increases drastically inflate the nation’s interest bill.
Net interest on debt will reach approximately $1 trillion this fiscal year, surpassing military spending and roughly matching Medicare’s cost. That equates to over $7,000 per household, making interest the fastest-growing line item in the budget. The nonpartisan Congressional Budget Office projects this interest bill will double again to over $2 trillion annually within a decade, even assuming rates fall from current levels.
There’s a circular logic to these budget dynamics. Consider the large budget package enacted last year.
In an unfavorable trade-off for low-income families, last year’s tax cuts were partially offset by nearly $1 trillion in reductions to Medicaid and historic cuts to food assistance. Similar pressures are hitting the discretionary side of the budget, which funds everything from infrastructure to medical research to childcare. Ultimately, deficit-financed tax cuts and escalating interest costs can provide the political justification for cutting the programs that help families hardest hit by the affordability crisis.
The pressure is also mounting on the tax side of the ledger.
Tariffs generated nearly $200 billion in revenues last fiscal year, more than doubling the previous year’s total and costing about $1,500 per household. But that money is not paid by foreigners; it is collected from American importers and largely passed on to U.S. businesses and consumers.
In effect, tariffs are a sales tax that falls hardest on families with the least room in their budgets. They may raise revenue for the Treasury, but they do so by making everyday life less affordable.
The war with Iran is adding to the affordability squeeze by pushing energy prices higher. The U.S. average price of gasoline is back to nearly $4.50 a gallon this week, up about $1.50, or 50%, since the war began, and diesel has surged to a record price above $6 a gallon. Cars run on gasoline, but the economy runs on diesel. Trucks, trains, farm equipment, and delivery fleets depend on it, so higher diesel costs eventually show up in the prices of groceries and other essential goods.
What can be done to help Americans deal with these pressures?
Foremost, resolving the war with Iran and lowering tariffs. And it doesn’t take advanced math to see that repeated high-end tax cuts enacted without offsetting revenues only add to our debt.
Also vital is a credible plan to stabilize the debt relative to the economy, targeting a deficit closer to 3% of GDP rather than the current more than 6%.
Achieving this strictly via spending cuts would inflict further harm on vulnerable Americans, while tariffs are no substitute for a durable tax code. True fiscal health requires restraint and adjustments across both revenue and spending, and it takes a Congress and White House willing to say so.
Global bond investors are losing patience. Interest rates are on the rise, and the U.S. Treasury’s efforts to stem the rise have done little to slow it. Investors don’t expect a balanced budget tomorrow, but they do expect a budget plan they can trust.
If we provide one, long-term interest rates should moderate, the government’s interest bill should stop crowding out the rest of the budget, and the pressure to cut the programs families count on should ease. If we fail, investors will impose a plan on their own terms.
The debt, the tariffs, the war, and the 7% mortgage are all of our own making. We can choose differently.
Jared Bernstein is a senior fellow at American Progress. He was chair of the U.S. Council of Economic Advisers under former President Joe Biden.
