The US Congressional Budget Office has released its recent budget deficit figures, based on current laws that include an anticipated extension of the Trump tax cuts. The FY 2025 deficit is projected to be 6.2% of GDP, increasing to 7.5% by 2055.
Debt is expected to rise to 156% of GDP by 2055, up from 100% currently, mainly due to lower immigration and slowing potential growth. GDP growth is forecasted to be 2.1% in 2025, and interest costs are anticipated to surpass defence spending this year.
America Faces Structural Fiscal Challenges
What this all means, in straightforward terms, is that America’s debt burden is set to keep ballooning over the next three decades. The underlying driver isn’t hard to spot—growth in the economy appears tepid relative to spending obligations, particularly with demographic headwinds starting to take shape. The decision to bake in tax extensions, an assumption now effectively codified in the budget outlook, serves to erode future federal revenues just when structural costs are rising.
With borrowing now projected to edge up towards levels that dwarf the current output of the economy, a few implications arise with little ambiguity. The most noticeable shift is the cost of servicing this borrowing—interest outlays are poised to overtake defence spending, probably within the next twelve months. That’s not something we typically see, and it changes the composition of the fiscal picture meaningfully.
Although headline GDP is expected to grow modestly—about 2.1% in the near term—that doesn’t necessarily offer much cushion. Immigration playing a smaller role than before trims labour force growth, and by extension, productive capacity. Combine this with fading productivity gains, and the long-term output path curves lower. All of this builds a stronger case for a persistent fiscal gap, not just a cyclical one.
Market Implications Of Rising Debt Pressure
In our view, this doesn’t create immediate pressure on benchmark rates or yield curves—yet it does inject a base-level fragility into long-dated risk pricing. Funding premiums at the long end may start to edge higher, not because of panic or default risk, but as a rational response to structural supply swelling against flat or diminished demand from traditional official buyers.
If one peels back the layers here, it’s less about 2025 and more about how forward expectations anchor valuation metrics today. With interest expenditure commanding a larger slice of federal outflows, there’s less flexibility for future fiscal initiatives, which may tighten expectations around circular stimulus responses during downturns.
The contour of these projections suggests that fiscal drag isn’t going away. It may even accelerate, nudging traders to consider rebalancing away from flatter rate structures. Yield premium at the back end of the curve cannot absorb infinite issuance without some form of concession. This may change nothing short-term, but forward curves are built on paths, not points.
We’ve been watching term premia adjust unevenly, hinting that markets are beginning to pencil in longer-tailed risks to stability and sustainability. Real yields remain sensitive, and forward volatility surfaces could yet tilt in ways not currently priced.
So—beyond the big numbers and charts, it becomes about attention to duration risk, the shape of the curve, and moments when fiscal clarity sharpens. There’s no need for flamboyant positioning. Instead, it’s about careful adjustment, favouring resilience over reaction.
Higher nominal borrowing needs don’t need to scare us—but they do need to be respected by pricing models, especially as macro growth assumptions look less inspiring under the weight of lower immigration and older demographics.
