The GDP Is Only Growing Because of the Federal Deficit: How Much of a Problem Is That?

Between tax cuts, the war against Iran, and the Supreme Court ruling against Donald Trump’s tariffs, the federal budget is headed further into the red. How much does that matter? Depends on which economist you ask.

In February, the Congressional Budget Office estimated the federal deficit would be 5.8% of the nation’s entire economic output in 2026, rising to 6.7% by 2036, well above the 3.8% average over the past 50 years.1 Since then, the Pentagon has reportedly asked for $200 billion to pay for the Iran war so far. And the Supreme Court dismantled Trump’s emergency tariffs and ordered refunds to be paid to businesses, which would push up deficits by an estimated $2 trillion over the next decade, according to the CBO.2

The U.S. economy itself only grew at an annual rate of 0.7% in the fourth quarter, meaning that if you trimmed spending to match revenues, the economy would be shrinking, not growing. In other words, the government is going rapidly into debt to prop up the economy. Although the effects of government debt are highly studied and debated by economists, many are looking at the trend with growing alarm.

"The current federal deficit represents a substantial injection of purchasing power into U.S. households," Christopher Thornberg, founding partner of Beacon Economics, wrote in a report last week. "The deficit amounts to roughly $15,000 per household annually, equal to about 9% of average disposable household income and nearly 6% of GDP."

As far back as 2024, after the Federal Reserve’s campaign of anti-inflation rate hikes raised borrowing costs, federal deficit spending had become "a crucial ingredient in maintaining money growth and thereby support for aggregate demand," Joe Seydl, senior markets economist at JP Morgan, wrote at the time.3

Thornberg is among the experts who view the rising federal debt as risky and unsustainable for very long.

"Today, even a small increase in interest rates or a modest slowdown in economic growth could cause the fiscal outlook to deteriorate rapidly," he wrote. "If such a fiscal reset becomes necessary, the resulting policy adjustments would almost certainly trigger a recession and/or a nasty bout of inflation."

Related Education

Understanding National Debt: Definition, Impact & Key Influencers

What Is Modern Monetary Theory (MMT)?

To be sure, other economists view the debt as less urgent. Adherents of Modern Monetary Theory, such as Stephanie Kelton, contend that the debt is relatively meaningless given the government’s ability to print money.4

What Does This Mean For Your Money?

The rising debt is causing an invisible drag on household budgets by pushing up bond yields, which in turn affect mortgage rates and borrowing costs across all kinds of loans. Higher budget deficits since 2015 have added $2,500 in annual mortgage payments and $250 a year to typical car loan payments for the median household, the Yale Budget Lab estimated last week.5

Seydl saw a risk that the rising debt leads to what economists call "fiscal dominance," when the national debt rises so high, and interest payments grow so steeply that they overwhelm the economy. Economists could discover this tipping point by research, or we could find out the hard way.

"The truth is that economists don’t know the limits of the U.S. fiscal deficit," Seydl wrote. "They don’t know what total debt stock, or interest expense, would tip the economy into fiscal dominance. There’s a Nobel Prize waiting for someone who can figure this out."