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| Secretary of the Treasury |
PRELIMINARY SUMMARY OF FISCAL YEAR 2025 BUDGET
The Congressional Budget Office (CBO) made their latest projection in January, 2025. The projected deficit in fiscal year 2025 will be around $1.8 trillion, the difference between about $5.2 trillion in revenue and $7.0 trillion in expenses. Interest on the national debt this year will be around $950 billion, over twice the interest expense in the fiscal year 2021 budget and equal to the defense budget. By 2035, the CBO expects the yearly budget deficit to increase to $2.7 trillion.
Interest expense this year passed budgeted outlays for the military. It is about equal to Medicare, and also to total non-defense discretionary spending.
Leaving aside Social Security and Medicare, interest expense is about 20% of total budget outlays. Interest expense is about half the budget deficit.
The $1.8 trillion budget deficit is 6-7% of total GDP, or approximately 10% of consumer spending. Adding the $1 trillion trade deficit, which is 3-4% of GDP, then a total of $3 trillion, or 10% of GDP, is being financed by these two deficits.
SOME BASIC DEFINITIONS AND A LITTLE DETAIL
Some basic definitions for people in government suffering from political amnesia:
Deficit. The difference between the federal government’s spending and its revenue in one fiscal year. The fiscal year starts on October 1. So fiscal year (FY) 2025 started on October 1, 2024. All years in this post are fiscal years. You know right away this is going to be confusing.
Debt. Short for national debt or federal debt. The sum total of all past government yearly deficits minus yearly surpluses.
PROJECTED NATIONAL DEBT
As of June 9, 2025, the national debt was $36.2 trillion. The debt/GDP ratio was 124%. The CBO expects it to increase to $59 trillion by the end of fiscal year 2035. So between now and 2035,
the national debt will increase by about $23 trillion!
On August 4, the CBO estimated that the recently passed budget bill will add at least $4 trillion more to the national debt over the next 10 years, more likely $5 trillion. Beside making the “temporary” 2017 tax cut permanent, the budget bill included large increases in defense spending and spending to deport residents. Next month, however, the CBO will attempt to estimate how much tax revenue the government will earn from increased tariffs. The possible range is about $2-$3 trillion over 10 years. So the net effect is a rather small increase compared to the projected $59 trillion national debt in fiscal year 2035. The big question, however, is whether the tariffs will lead to higher rates of inflation in the short run and a recession in the longer run.
At some point, buyers of government debt will demand higher interest rates because of higher risk or higher rates of inflation. Higher rates are not factored into CBO debt projections.
If these numbers don’t scare the hell out of you, you are probably Donald Trump or a member of Congress.
WHO OWNS THE NATIONAL DEBT?
Commentators often say we shouldn’t worry about the national debt because we owe it to ourselves. Well, sort of.
The total current (December 2025) national debt $38.4 trillion compared to over $36 trillion in 2024. $28 trillion, or about 80%, is owned domestically. About 20% of the national debt ($7.4 trillion) is owned by…the U.S. government! Mostly Social Security and other trust funds and federal employees’ retirement funds. This percent will probably fall over the next ten years as the trust funds of Social Security and Medicare go to zero. About $4.7 trillion is held by the Fed; the Fed is reducing its holdings. Private American investors and institutions own less than half of the total, or $15.2 trillion.
Foreign lenders own about $9 trillion, or about 25% of the Treasury securities. About half of this is held by foreign central banks and the other half by foreign financial institutions and individuals. Much of this is used to finance international trade. China owns less than $1 trillion of this. The number has been going down; don’t believe the scare rhetoric that the Chinese government could sell all its U.S. government debt and crash the American economy. More is held in “tax haven” (money laundering, money hiding and tax avoidance) countries and banks; the Cayman Islands, a notorious “tax haven,” is now the largest holder of U.S. government debt. It is comforting to know that South American and Mexican drug lords, corrupt government officials everywhere and Russian oligarchs have faith in the U.S government and its dollar.
The Fed is currently selling off part of its large inventory of Treasuries it accumulated to help finance Covid stimulus programs. So it looks like the federal government will have to sell most of its future debt to private Americans and foreign investors.
Americans are always complaining they pay too much in federal income taxes. This year, revenue from personal (household) income taxes will be around $2.4 trillion, or about 1/2 of federal expenditures minus Social Security and Medicare.
FISCAL ACCOUNTING: PROJECTIONS TO 2035
The projections in this post are from the Congressional Budget Office (CBO), the non-partisan organization that gives Congress figures, analysis and expert advice. These are from January, 2025. They are updated every two years.
The CBO projections are probably too optimistic. They are trend projections of existing programs and tax revenue. They assume that events such as recessions, epidemics, wars, or any new spending programs, such as to fight the effects of global warming, will not happen over the next ten years. They assume there will be no further tax cuts. Good luck!
Based on past experience, it is likely that at least one recession will occur in the next eight years.
Social Security and Medicare are funded by their own taxes and are working down their trust funds (selling government bonds) that fund part of the benefits. Subtracting Social Security and Medicare taxes and expenditures from the Federal budget, other revenue covers about 80% of all other government spending; the other 20% is the deficit and financed by borrowing.
I first wrote this post about eight years ago (2017). I update it about every two years. Every time it gets more depressing. When interest rates the government paid on the national debt were very low, no one in the government talked about the rising interest expense and what to do about it. But now with higher interest rates on a larger (and growing) national debt, interest expense has risen and has become a larger part of government budgets. Even if interest rates stay where they are now, in 2035 compared to 2025, the increase in interest expense will about equal the increase in personal income taxes, about $1.8 trillion each. In other words, families will be paying more taxes just to cover the increased interest expense.
Interest rates on the national debt are likely to rise as the national debt continues to increase more than nominal (taxable) GDP.
But still, no serious discussion. I understand why. For 20 years until late 2022, the Fed kept interest rates at very low levels. Among other effects, this was a massive subsidy to the federal government. It kept the cost of the increasing national debt low, below the political radar screen. No elected representative or politician wants to talk about it. The choices to minimize the increase in future interest expenses are political dynamite. Better to blame deficits on welfare payments to illegal immigrants.
For a detailed and lucid presentation of the current federal debt and the issues involved, see John Mauldin’s essay titled “Debtors and Creditors” at mauldineconomics.com.
SOCIAL SECURITY
Even the most conservative projections are scary as more Americans get older (the number of Americans over 65 years old is expected to double over the next 25 years) and the health care industry is doing a really good job of keeping us baby boomers alive longer (mostly paid for with government funds). In addition, part of Social Security expenses comes from past Social Security taxes that are in the Social Security Trust Fund. This fund is projected to go to zero around 2034/5. Social Security benefits will fall at least 20% or the deficit will come out of general tax revenue. This will add about $300 billion to general expenditures and the yearly deficit. With the rising number of senior citizens, who like to vote (about 30% of registered voters by 2035), guess which alternative is more likely. This could be fixed with some relatively minor changes to Social Security taxes or raising retirement ages spread out over 10 years. But so far Congress has totally ignored this large addition to future yearly deficits and the national debt.
After 2035, when the trust funds run out, we will have fewer workers paying in to support many more recipients of Social Security and Medicare. More of the cost will come out of general tax revenue, leading to even higher deficits.
YEARLY DEFICITS AND THE NATIONAL DEBT
The government has benefitted from the very low interest rates engineered by the Fed over the last twenty years. But interest rates began to rise as the Fed quickly raised the Fed funds rate to bring down aggregate demand and the inflation rate in 2022. Of course this had no effect on government spending. Every one percent increase in the interest rate on the national debt will add at least $300 billion a year to expenditures and the deficit. Another way to look at it is that the interest expense in this fiscal year was more than half of the deficit. At current interest rates, total interest expense could be about 60% of the yearly deficit in a few years (as the past lower-cost debt is rolled over) and possibly a higher percent further out. The government is borrowing more money each year to pay interest on past borrowing.
A combination of rising national debt of over $2 trillion a year combined with rising interest rates would push politicians and us voters even further into denial. So far, everyone wins. We get corporate and household tax cuts. We spend more money on defense and national security than the next nine countries combined. We have generous social welfare, health, and retirement benefits. After paying for Social Security and Medicare with dedicated taxes, we borrow over one-fifth of the total cost of the rest of the budget every year. Even the most optimistic projection indicates that by 2035 all of the income the Federal government takes in will only cover “mandatory” programs (mostly Social Security, Medicare, and Medicaid) and defense. Maybe a part of national debt interest, depending on future interest rates. All of the rest of the budget, all the subsidies and tax loopholes and worthy programs, are funded through borrowing. Who says there’s no such thing as a free lunch program? Party on!
What is the point of this discussion? Fiscal policy – the size and changes in the size of yearly deficits and government debt – has nothing to do with political philosophy or promoting economic growth and stability. It has to do with lowering tax rates and no one paying the full cost of received benefits and services.
TRUMP TARIFFS AND TAX CUTS
A few words about fiscal changes due to proposed programs from the Trump administration and the current budget.
The U.S. government received about $100 billion a year in revenue from tariffs before the Trump tariffs. Total tariff revenue could rise by about $250 billion – $300 billion a year, depending on where the final tariff rates end up. This would reduce the projected deficit. If this happens, the higher tariffs of about $3 trillion over the next ten years would offset more than the $2 trillion increase in the national debt increase from the tax cut from the budget bill.
But not for the wider economy. The extension of the 2017 tax cut mostly benefits upper-income families because they pay most of the income taxes. The tariffs hit all American families. The tariffs are a disguised tax increase. Families will probably pay much of the additional tariffs in higher prices. And more unemployment. So the combination of the two is an income transfer from all “hard-working” American families to upper-income families and the U.S. government.
If other countries retaliate, if global supply chains are disrupted, if total investment falls, the chances of a national and global recession go up. Everyone loses.
THE DECIFIT, TAX RATES, AND TAX POLICY
Personal income taxes were $2.4 trillion in 2024. They are expected to increase to $4.2 trillion in 2035. Again, the increase in personal income taxes is equal to the increase in interest expense.
The size of the deficit can also be affected by changes in the income tax rates but only to a limited extent. About 45% of all households pay no federal income tax. Of all the households that file an income tax, about 80% pay more in “payroll taxes” (Social Security and Medicare taxes) than income taxes. The Federal government collects only slightly less revenue from payroll taxes (Social Security and Medicare) than from personal income taxes.
A high percent of personal income taxes is paid by high income households; they receive most of any personal income tax cut.
Studies by the IRS show that small businesses and high-income households substantially underreport their income. Large corporations pay substantially less than the statutory rates; some large companies, including GE in the past, paid nothing at all. Large social media companies have moved much of their intellectual property to Ireland, which has one of the lowest corporate tax rates in the world. Warren Buffett’s company pays a lower tax rate than almost everyone reading this post. Many industries have special tax reduction rules, including “depletion allowances” for oil and natural gas drillers. Property developers and commercial property owners are notorious for not paying income taxes.
The Trump administration, through DOGE, has laid off many IRS auditors. Further cutbacks are in the current budget bill. Given his background, I guess President Trump just does not like the IRS collecting taxes from rich people and tax dodgers.
FINANCING THE FISCAL DEFICITS: THE BOND MARKET
Even as the nominal GDP, and thus the tax base, increases, the yearly deficit exists year after year. The old bonds do not disappear by increased tax revenue paying them off. As the bonds come due (mature), they are retired (paid off or rolled over) with new bonds. Combined with new deficits and debt, the national debt gets larger. And larger. Any political rantings about reducing the national debt is just so much hot air contributing to global warming. (Sidebar – it seems to me that many people who talk about reducing the national debt don’t know the difference between the yearly deficit and the cumulative national debt.)
Again, the government finances the national debt by selling bonds. Who buys the bonds, and why? American bonds are attractive mostly because they are viewed as the safest bonds in the world. That is, the U.S. government is never expected to declare bankruptcy. Over 30 governments since WWII have partially or totally defaulted on their debt. And not just poor countries. In the 20th century, Russia, Germany, China, Japan and Italy have defaulted on their debt. Lost wars and revolutions do that.
If bond buyers perceive that U.S. bonds are becoming riskier, the first reaction would probably be to demand higher interest rates to compensate for the increased risk.
There is a fear this year (2025) that the proposed Trump tariff increases might lead to American and foreign holders of the national debt to start selling off U.S. bonds. The increased awareness of the large and rising debt itself increases the risk of holding American bonds. Other reasons are geopolitical. But holding alternative currencies entail the same risks; most of the larger economies have debt/GDP ratios comparable to that of the United States.
Another reason is that the U.S. dollar is falling compared to most other currencies. Holding dollars means that when dollars are exchanged for other currencies, they buy a smaller amount. That is, they are worth less to foreign holders and global corporations.
The increases in tariffs, increases the chance of a national and global recession. This would probably increase the U.S. yearly deficit over the projected CBO projected amounts.
But why does the yearly deficit occur year after year (after year)? Or, as an economist might say, why is it structural and not cyclical as Keynes hoped? After all, total tax revenue goes up most years. If spending stayed the same, each yearly deficit would go down. One day in the Star Trek future, there would be no yearly deficit and a constant national debt. Easy answer: spending goes up and tax revenue doesn’t go up as much as expected because of the political popularity of tax cuts.
FISCAL POLICY AND ECONOMIC POLICY
The federal budget and its deficits do not exist in a vacuum. They are part of the overall economy. Budget deficits are not inherently good or bad. When they occur over the growth cycle is important.
Government spending is all lumped together in macroeconomics. Yet what governments spend their money on is important. A lot of it is “income transfers,” taking tax money from one group and distributing it to others. Much of it goes to people who are old or sick or poor but also some goes to less deserving folks. Some of the spending should be considered consumption (gold and marble in decorating the White House). Another part is public investment. This part is vital to economic growth and the development of new technology. Government pays for basic research, public health, infrastructure, education and training, financing and subsidizing private investment, and paying for some of the social costs (such as cleaning up toxic waste dumps) of past private investment and production. This does not include the future costs of fighting the effects of global warming; preliminary estimates are very scary.
Another way of looking at it: what the spending financed by debt is used for. A major use in the past has been to finance tax cuts. An extreme example was stimulus programs to fight the recession caused by Covid. Almost all of the stimulus money went to all American families in the form of higher income. The idea was that a big rise in total income would lead to a big increase in total spending. Not as much as expected. There was a big increase in total household saving; many American families didn’t need the extra income. This contributed to later inflation and higher interest rates. This is one reason the prices of stocks and houses are now going up.
What the stimulus money was not used for was investment to increase future economic growth. Some of the money in the bills passed by the Biden administration started to address increased infrastructure needs and the cost of combating the effects of global warming. President Trump, like earlier presidents, wanted Congress to cut back on some of the government’s basic research. It is almost impossible to think of any new technology developed after WWII that the federal government did not help finance and develop, including computers, microchips, jet aircraft, the internet, GPS, digital photography, biotechnology, and autonomous driving. Especially in the early stages of basic research and applied research and development. Developing new technology is the main source of economic growth and thus increases in tax revenue.
The idea that there is some economically rational fiscal policy is a fiction. Presidents who propose yearly budgets and congress members who vote on them are rational. The want to get reelected and expand favorite programs. They ignore the present and future cost of the yearly deficits they create. Somebody else’s problem. Your children and
Some commentators believe the “debt overhang” of high and rising national debt and its interest expense will be the cause of our next economic crisis.
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See the companion post Government Finance 102: Monetary Policy: The Red Queen’s Race for how the Fed has facilitated the creation of our large federal deficit. For many years, the Fed kept the fed funds rate close to zero; this meant the government could increase borrowing faster than interest expense. Almost free money.
You might want to pair this essay with the latest population and demographic projections (fewer people, more old people). See
Demographics, Immigration and Future Economic Growth of the United States
If CBO trendlines were projected out to 2045, the national debt would be more than $70 trillion. U.S total population and the size of the labor force in 2045 is very likely to be less than now. Retired Americans will be a higher percent of the total population.
You might be interested in
Introduction to the Stock Market Crash of 1929 and the Start of the Great Depression
The CBO assumption that nothing will ever go wrong in the U.S. economy isn’t likely. To be fair, this restriction was put on the CBO by Congress.
Elsewhere in this blog, I argue that the main form of our economic competition, and geopolitical rivalry, with China will depend on our success in developing new technologies. See
American Tariffs and the U.S. Economic War with China
If the United States maintains the current proposed tariffs averaging around 15-20% and because of current economic policies cannot compete with China in global markets, CBO and other economic projections are unrealistically optimistic.
For a list of all the posts on this blog, see
List of Posts by Topic
with links to all other essays. There are posts on the demographics of other countries and the world as a whole, the Beginning of the Industrial Revolution, American Economic History, and American History. Even posts on finance, business, and economics.
