Economists warn: Solving the U.S. national debt problem will cost $827 billion in funding

Ask AI · Why has the post-war debt reduction strategy become ineffective today?

The Cato Institute released a report indicating that traditional debt management measures are no longer feasible, and the United States is facing an unprecedented fiscal crisis. Image source: Brendan SMIALOWSKI / AFP via Getty Images

The latest report shows that to prevent the U.S. national debt from doubling before 2054, spending must be cut or taxes increased by $827 billion, roughly equivalent to the United States' annual defense budget.

The think tank Cato Institute's report released last Wednesday states that to keep the U.S. debt-to-GDP ratio at 98% in 2024, the U.S. must cut spending or raise taxes by an amount equal to 2.87% of GDP, approximately $827 billion. This figure is close to the U.S. defense budget request: $892 billion for fiscal year 2026 and $850 billion for fiscal year 2025.

Currently, the U.S. national debt has reached $39 trillion and is expected to continue soaring. Last year, Trump signed the "Big and Beautiful Act," raising the debt ceiling by about $5 trillion. Although this act cut social welfare spending such as Medicaid and food stamps, the U.S. budget deficit is still projected to reach $1.9 trillion.

Today, the debt problem continues to worsen: this year's interest payments on national debt are expected to surpass $1 trillion, exceeding military spending, pushing the U.S. toward a dangerous "debt spiral." Over the next five years, interest payments on U.S. debt are projected to grow faster than GDP. High debt levels combined with rising interest rates further exacerbate fiscal difficulties. As a result, Moody's downgraded the U.S. long-term sovereign credit rating last year.

_****

Comparison of debt and military spending

****_

Although the U.S. debt-to-GDP ratio in 2024 is below the post-WWII peak of 106% (when military spending as a share of government expenditure reached a historic high), William G. Gale, senior fellow at the Brookings Institution and co-author of the report, pointed out that a key regulatory measure taken by the government at that time is no longer feasible today.

"Over the course of the four or five decades after the war, we actually gradually reduced the share of defense spending in GDP from about 9%," he said in an interview with Fortune magazine. Despite steady growth in defense spending in recent years, due to the significant expansion of the U.S. economy after the war, the defense share of GDP in 2024 is only 3.4%. Gale noted that it is now impossible to replicate the post-war model of large-scale military budget cuts to the same extent.

"We can no longer replicate the past path," he said. "We cannot reduce defense spending as a share of GDP from 3% to -3%," because the defense share of GDP cannot be negative unless the government profits from military assets exceeding its military expenditures.

While cutting military spending cannot fundamentally resolve the U.S. debt crisis, it is undoubtedly a step in the right direction. However, Trump took the opposite approach: proposing a defense budget of up to $1.5 trillion for fiscal year 2027, exceeding the peak of defense spending during the Vietnam War, Reagan's military build-up, and other post-WWII highs.

_****

Practical dilemmas in resolving the debt crisis

****_

The only feasible way to curb the continuous rise of the national debt is to implement a series of highly controversial measures: tax increases and spending cuts.

"We are in uncharted waters," Gale said. "We must consider tax increase plans while strictly controlling the growth of expenditures."

Trump once vigorously promoted solving the debt problem through other mechanisms, primarily his tariff plan, claiming last year that this plan "has helped reduce the fiscal deficit by over 25% in this fiscal year."

However, budget experts do not agree with this view.

Kyle Pomerleau, senior fellow at the American Enterprise Institute and an expert in international tax policy, recently told Fortune magazine:

"Tariffs can indeed generate some revenue, but they are not enough to reverse the overall fiscal situation in the U.S."

The president also hopes for the "Golden Visa" program, initially set with an investment threshold of $5 million, now lowered to $1 million per applicant, providing a fast-track path to citizenship for immigrants.

"Issuing 1 million of these visas would total $5 trillion; selling 10 million would generate $50 trillion," Trump said last year. "Currently, the U.S. national debt is $35 trillion, and this income could help solve the debt problem."

However, in the past year, the U.S. has only sold one such visa. (Fortune China)

Translator: Zhong Huiyan - Wang Fang

Apply for the Fortune List

We invite outstanding companies from all fields to participate

Subscribe to Fortune

Gathering strategies of the Fortune Global 500, forging elite Chinese business leaders