The Still-Rising U.S. Public Debt: Twelve Questions & Answers

In a new Must C report from Citi Research, Chief Economist Nathan Sheets and a team of economists and macro strategists consider the growing concerns around U.S. public debt. In recent years financial markets have increasingly grappled with the issue of the U.S. government’s bulging fiscal imbalances and rising debt. Who’s going to buy the forthcoming issuance of Treasuries, estimated to exceed $20 trillion over the next decade? How much debt is “too much” — can the debt ratio safely rise another 20%, 50% or 100% of gross domestic product (GDP)? What might trigger a full-blown crisis in the U.S. Treasury market, and what would such an episode look like?

The new report, an extension and update to our late-2023 Must C on the same subject, is organized around 12 key questions and looks at the debt situation from historical, international and macro perspectives.

U.S. federal debt levels are slated to approach 120% of GDP during the coming decade, far surpassing the post-World War II peak, and these high debt levels — along with entrenched deficits and worries about surging issuance — have exerted upward pressures on Treasury yields in recent years.

We judge that President Trump’s “Big Beautiful Bill” (BBB) and tariff revenues combine to leave the U.S. debt trajectory just slightly higher. But the BBB included a range of spending cuts, many with back-loaded start dates, and it remains to be seen if those cuts will be ultimately implemented. Similarly, several of the BBB’s new tax reductions have expiration dates, but history suggests some caution about whether those expirations will come to pass.

We can’t predict danger thresholds as debt levels rise, or the amount of debt that’s simply “too much.” But we think it’s unwise for policymakers to test where those thresholds might be. We see the prudent fiscal-policy path as, at minimum, not to push debt levels any higher. A more ambitious path would be a sustained long-term effort to bring debt levels down, through some combination of higher taxes and reduced expenditures. This would put the U.S. economy on a more robust and sustainable footing, but we have little hope that we’ll see meaningful remedial action anytime soon. 

We don’t think a full-blown adverse scenario is likely, but the 2022 UK gilt crisis offers a cautionary tale. The hallmark of an adverse scenario would be a sharp, unexpected deterioration in the market’s appetite for Treasuries, with sharply higher Treasury yields and rising risk premiums in credit and equity markets. Given the dollar’s status as a reserve currency, these stresses would be quickly transmitted to financial markets abroad.

While such a scenario is possible, we think the most likely outcome is that investor concerns about U.S. debt levels remain a headwind for the economy and markets but prove manageable. The U.S. economy continues to possess deep resources and significant strengths. It’s the largest in the world, with engines of growth that have proved resilient and dynamic in recent years, meaning its capacity to pay debt is high. The U.S. private sector is less indebted than those in many similarly situated countries, and U.S. asset positions are strong. And the U.S. dollar remains the world’s reserve currency, with the Treasury market offering investors unique depth and range of instruments. We also think that while the Fed’s independence faces challenges, it will remain well-entrenched, offering an important safeguard against high inflation. Such strengths should give investors the confidence to purchase the debt despite high levels of indebtedness and political noise.

The 12 questions and answers posed in the report delve into these issues from a broad range of perspectives, ranging from near-term political dynamics likely to be in play to the implications for the dollar’s status as the world’s reserve currency.