The Debt Machine That Won’t Stop

In their new working paper, Alan Auerbach and Bill Gale revisit the long‐term U.S. fiscal outlook and update the traditional “fiscal gap” analysis in light of very large projected debt burdens. The authors’ key message: Under current law and “current policy” (i.e., assuming extensions of current tax cuts and consistent spending growth), the U.S. faces an unsustainable fiscal path.

Auerbach and Gale project that, under current policy, U.S. debt held by the public will rise from roughly 100% of GDP today to 183% by 2054. If temporary tax breaks are extended (as they always are) and spending keeps pace, the debt could approach 199% of GDP by that date. If interest rates increase in accordance with the empirical literature, then debt rises even higher, to 233% by 2054.

But let’s be honest: Those levels are theoretical, not plausible. Long before debt reached 200% of GDP, financial markets would force a correction. In reality, the austerity threshold for the U.S., the point at which bondholders lose faith and demand punitive interest rates, likely lies somewhere between 170% and 190%, and possibly lower.

A future mortgaged twice over

The debt explosion isn’t coming from defense buildups or some one-off pandemic bill. It’s baked into the structure of the federal budget: automatic growth in Social Security and Medicare, higher interest payments on existing debt and a tax base that hasn’t kept up with the promises politicians have made.

Interest alone is now the fastest-growing line item in the budget, already larger than defense, and soon to overtake all nondefense discretionary spending combined. Auerbach and Gale note that the federal deficit was a whopping 6% of GDP last year and that the government borrowed more than a quarter of every dollar it spent.

What it will take to fix our fiscal path

The paper calculates something called the “fiscal gap”—the size of the permanent tax increase or spending cut needed to keep debt from climbing further. The answer is brutal: about 3.4% of GDP on a permanent basis.

In today’s economy, that’s roughly $800 billion in annual terms, just to stop the debt ratio from rising. To put the number in context, that’s about a third of all income-tax revenue or nearly a quarter of all federal spending outside Social Security and Medicare.

And that’s assuming interest rates and growth stay calm. If rates rise just modestly as debt mounts, the required adjustment gets even larger.

The quiet crisis of crowding out

Auerbach and Gale also remind readers of a simple truth that Washington prefers to ignore: When government borrows, it’s drawing from the same pool of savings that private businesses use to invest. More federal debt means less capital available for everything else: factories, start-ups, housing, innovation.

The authors estimate that every one-percentage-point rise in the debt-to-GDP ratio nudges interest rates up by about three basis points. That may sound small, but compounded across decades of rising debt, it’s enormous.

Perhaps the most striking part of the paper isn’t the math; it’s the politics behind it. Auerbach and Gale describe how the budget process itself has become a machine for evasion, as the recent government shutdown demonstrated: continuing resolutions that punt decisions, debt-ceiling fights that solve nothing, and “temporary” tax and spending provisions that everyone knows will be renewed.

Congress no longer budgets; it improvises. And every improvisation tilts toward more debt. The result is a system that pretends to control the future while merely postponing it.

Why this matters now

We’ve become used to treating trillion-dollar deficits as the new normal, just another line on a Congressional Budget Office table. But this paper is a reminder that arithmetic still exists. There’s a limit to how long a government can borrow faster than its economy grows.

At some point, interest costs will compound faster than tax revenue, and the choice will become explicit: Cut benefits, raise taxes or inflate away the difference. None of those options are pleasant, and all are political poison.

What’s remarkable about Auerbach and Gale’s analysis is how mainstream it is, and how dire it still looks. There’s no ideological spin here, no “starve the beast” rhetoric or modern monetary theory (MMT) optimism. It’s just the math, and the math says the federal budget is on a path that ends with interest consuming everything.

Auerbach and Gale don’t offer easy answers. They simply show that the longer we pretend deficits don’t matter, the harder the reckoning will be. Debt doesn’t need to trigger a crisis tomorrow to make us poorer today. It does that slowly, by eroding the savings and capital that should be building the next generation’s economy.