Although already alarming, federal debt growth may be just at the tip of a “hockey stick blade.”

According to the Congressional Budget Office (CBO), the U.S. is on track to add $5.2 billion in debt daily. By 2033, the national debt is expected to swell to $50 trillion:

Chart by CBO

These protections come at a time when the Treasury is facing a reputation crisis, with leading credit agency Fitch having announced a bombshell downgrade of U.S. debt.

In the wake of the announcement, calls for debt reform have risen.

As former Treasury Secretary Hank Paulson said in a recent interview, “Our fiscal trajectory is concerning… The longer we wait, the more painful the solution will be.”

But can a country that’s been binding on deficits for the past two decades get back to fiscal prudence?

Where will the increase come from?

Federal debt has been rising for over 50 years. But it was the Covid pandemic that really kick-started the staggering increases we’ve seen recently.

In just three years, from 2019 to 2022, total federal debt increased by more than $8 trillion, based on figures from the U.S. Treasury.

According to the CBO, the national debt currently represents 98% of GDP. The CBO expects that number to rise to 115% by 2033 without any major changes.

The culprit? Higher deficit spending driven by two main factors: an aging population and the interest owed on debt.

Almost half the American population is now over 40, and as the age of the population grows, so will healthcare and retirement costs.

By 2033, Social Security expenses are expected to rise from 5.1% to 6.0% of GDP. Meanwhile, major healthcare programs will grow from 5.8% to 6.6%.

At the same time, interest expenses will soar from 2.5% to 3.6% of GDP.

The CBO is not the only independent government office sounding the alarm. In a May report, the Government Accountability Office, a nonpartisan Congressional agency, put it bluntly: “The federal government faces an unsustainable fiscal future.”

That future could be even more unsustainable if such a significant debt burden causes interest rates to rise.

High debt could lead to high rates

The CBO’s baseline assumption, which led to the 115% GDP figure, assumed that long-term interest rates would moderate. But this might not be the case.

As the government borrows more, investors could start worrying about its ability to repay all that debt. They may, therefore, start charging the government a higher interest rate to borrow.

If you lend money to a friend who already owes other people a lot, you might be hesitant or ask for a higher interest rate on that loan. Ditto Treasury investors.

The Manhattan Institute, a think tank, found this worry about higher rates plausible in a national debt report.

“Several realistic economic scenarios could easily push interest rates back up to 4%–5% within a few decades - which would coincide with a projected debt surge to greatly increase federal budget interest costs.”

The CBO ran the numbers and found that higher interest rates could cause debt to be almost 119% in 2033, not 115%. That could add an extra $1.5 trillion to government debt.

But higher interest rates won’t just affect the government budget but also everyday people.

More money on interest, less money on everything else

The CBO projections anticipate that new borrowing will cover the increased spending on interest expenses and an aging population.

But if a looming debt crisis makes new borrowing difficult, the government may be forced to cut spending. And to avoid a default, stopping interest payments would be a last resort.

The government, therefore, may be forced to tap Social Security, Medicare, and Medicaid funds—programs that account for 58% of government spending, according to the U.S. Bureau of Economic Analysis (BEA).

Brian Riedl, a senior fellow at the Manhattan Institute, believes that Congress will have no choice but to make cuts to entitlement programs to stave off a debt crisis.

“The danger is that waiting for a debt crisis will make the inevitable reforms so much more drastic and painful.”

Is there a way out?

The CBO’s projections are just that: projections. There are a couple of ways that the debt crisis could be averted.

For instance, the economy may grow quicker than expected. And just like a wealthier household can sustain more debt, a wealthier country can also handle more debt.

The CBO projects that strong growth in economic productivity over the next decade could lead to a more manageable debt load of 107% by 2033.

Next, interest rates could fall—which would lower the government’s interest expense, reducing the deficit.

The CBO’s calculations assume rates to be around 4% over its projection timeframe.

The latest Fed projections, however, expect rates to average 2.5% over the longer run. Whether the Fed or the CBO is right will have a sizable impact on debt sustainability.

Finally, the government could reform the federal budget. That could put the country on a path toward paying down the debt and finding a more sustainable trajectory.

The catch is that closing the deficit may prove too tricky a political feat.

Former CBO chief Doug Elmendorf laments that both parties have abandoned the idea of either tax increases or entitlement reform to close the deficit.

“Both those positions are obviously politically popular, but they take off the table the biggest pieces of the federal budget… So, it’s increasingly hard for either party to develop a plan that puts fiscal policy on a sustainable path.”

Unless, of course, there’s an emergency, but what that may be and when only time will tell.