Federal Debt Reaches 101% of GDP for First Time Since World War II, CBO Reports

WASHINGTON — Federal debt held by the public will reach 101% of GDP by the end of fiscal year 2026, a level not seen since the aftermath of World War II, according to a Congressional Budget Office report released February 11. The CBO projects that debt will continue climbing to 120% of GDP by 2036, surpassing the all-time record of 106.1% set in 1946 by the end of this decade.

The agency’s 10-year outlook has worsened by $1.4 trillion compared to its January 2025 projections, driven largely by the fiscal impact of the One Big Beautiful Bill Act signed into law last July. Annual deficits are projected at $1.9 trillion in fiscal year 2026, rising to $3.1 trillion by 2036. Cumulative deficits over the next decade total $24.4 trillion.

“The fiscal trajectory is not sustainable,” the CBO director stated in an official assessment accompanying the report.

Interest payments surpass defense spending

For the first time, net interest payments on the federal debt will exceed $1 trillion in fiscal year 2026, eclipsing both the $885 billion defense budget and the $708 billion spent on Medicaid, according to an analysis by the American Action Forum, a center-right policy institute.

By 2036, interest payments are projected to reach $2.1 trillion, consuming nearly one in five federal dollars. Over the full decade, the federal government will spend $16 trillion on interest alone, according to the Peter G. Peterson Foundation, a nonpartisan organization dedicated to “addressing America’s long-term fiscal challenges to ensure a better economic future”.

“The CBO’s latest budget projection is an urgent warning to our leaders about America’s costly fiscal path,” said Michael Peterson, CEO of the Peterson Foundation. “Borrowing trillion after trillion takes us in the wrong direction, leading to higher interest costs and higher prices for everyday needs.”

Interest costs at 3.3% of GDP in fiscal year 2026 eclipse the previous record set in 1991, and net interest is now the fastest-growing category in the federal budget. Interest payments are projected to grow 106% over the decade, according to the Committee for a Responsible Federal Budget, a nonpartisan fiscal watchdog that describes itself as “a non-partisan, non-profit organization committed to educating the public on issues with significant fiscal policy impact.” That growth rate is double the 53% increase in total federal spending over the same period.

What is driving the deterioration

The 10-year deficit projection of $23.1 trillion is $1.4 trillion worse than what the CBO projected in January 2025. Several factors contributed to the worsening outlook.

The One Big Beautiful Bill Act is the largest single driver. The CBO estimates the law increases deficits by $4.7 trillion between 2026 and 2035, primarily through the permanent extension of Tax Cuts and Jobs Act provisions that were set to expire at the end of 2025. Individual income tax revenue alone is reduced by $4.4 trillion over the period. Mandatory spending cuts of $1.2 trillion partially offset the revenue losses, according to The Hill.

Higher tariffs generate $3 trillion in new federal revenue through 2035, partially offsetting the OBBBA’s fiscal cost, according to the CRFB. However, the CBO projects those tariffs will increase consumer inflation through 2029, delaying the Federal Reserve’s ability to reach its 2% inflation target until 2030.

Other factors include higher-than-expected Treasury yields, which increase debt servicing costs, and reduced immigration, which lowers both the labor force and tax revenues.

Ninety percent of spending growth locked in

The CBO projects total federal spending will grow from $7.4 trillion in fiscal year 2026 to $11.4 trillion by 2036. Ninety percent of that $4 trillion increase comes from just four categories: Social Security, major health care programs, net interest, and veterans’ benefits, according to a CRFB analysis.

Social Security spending rises from $1.6 trillion to $2.7 trillion, accounting for 27% of all spending growth. Major health care programs, including Medicare, Medicaid, and Affordable Care Act subsidies, grow from $1.9 trillion to $3.1 trillion, accounting for 30%. Net interest accounts for 28% of growth, and veterans’ programs contribute another 5%.

The demographic pressures underlying these increases are structural. Americans aged 65 and older will grow by 42% by 2050, driving sustained increases in Social Security and Medicare costs, according to Fortune.

Two trust funds face insolvency within the decade. The Highway Trust Fund is projected to be exhausted by fiscal year 2028, and the Social Security Old-Age and Survivors Insurance trust fund by fiscal year 2032, one year earlier than previously projected, according to the CRFB. Under current law, trust fund exhaustion would trigger automatic across-the-board benefit cuts unless Congress acts.

Why this time differs from World War II

The last time federal debt exceeded GDP was in 1946, when wartime borrowing pushed the ratio to 106.1%. After the war, debt-to-GDP declined steadily, falling to 23% by 1974. That decline was made possible by a combination of large budget surpluses, rapid economic growth, surprise inflation, and the abrupt end of temporary wartime spending. Outlays dropped to roughly 18% of GDP, and deficits averaged just 1.1% of GDP for nearly three decades, according to the Peter G. Peterson Foundation.

Today’s trajectory is fundamentally different. Federal spending is projected to average 26% of GDP over the coming decade, while revenues average roughly 18%. Annual deficits are projected to average 6.1% of GDP, more than double the 3% often cited as a sustainable benchmark and more than double Treasury Secretary Scott Bessent’s stated goal of shrinking the deficit to about 3% of output, according to Al Jazeera.

The Baker Institute at Rice University found that real GDP over the next 30 years is projected to grow by 66%, roughly one-third as much as the period following World War II. “Economic growth alone will not be sufficient to outpace debt accumulation,” the institute concluded. An NBER working paper by economists Alan Auerbach and William Gale found that stabilizing the debt-to-GDP ratio at 2024 levels would require permanent spending cuts or tax increases equaling 2.9% of GDP.

The growth counterargument and debt spiral risk

Defenders of current fiscal policy point to near-term economic strength. The CBO projects real GDP growth of 2.2% in 2026, partly boosted by the OBBBA’s economic stimulus. The Tax Foundation, a policy organization that describes itself as “the world’s leading nonpartisan tax policy nonprofit,” estimates the law increases long-run GDP by 0.7% through lower tax rates and enhanced business investment deductions. Dynamic revenue effects reduce the OBBBA’s fiscal cost from $4.9 trillion to $3.8 trillion on a dynamic basis. Tariff revenue of $2.1 trillion over the next decade further offsets the law’s costs, and supporters of the tax cuts note that extending the TCJA provisions preserves relief for working families.

However, the CBO projects growth will slow to 1.8% annually after 2027. The CRFB warns that later in the decade, the average interest rate on all federal debt may exceed nominal economic growth, a condition that could represent the beginning of a debt spiral, Fortune reported. If tariffs are struck down by the courts and policymakers extend expiring provisions, deficits could reach $3.8 trillion by 2036 with debt climbing to 131% of GDP.

Jonathan Burks, executive vice president of the Bipartisan Policy Center, an organization whose stated mission is to “achieve bipartisan solutions” to national policy challenges, said: “There’s no sugarcoating it: America’s fiscal health is increasingly dire. Our debt is now 100% of GDP, and rather than pumping the brakes, we are accelerating. These large deficits are unprecedented for a growing, peacetime economy.”

Burks added: “The good news is there is still time for policymakers to correct course. There are many solutions to improve our trajectory.”

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