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Federal borrowing can put upward pressure on long-term interest rates and increase the share of the budget spent on interest. That can leave lawmakers with less room to fund other priorities, but it does not automatically determine your tax bill or trigger cuts to a particular service. The effects depend on the amount borrowed, the rates paid, economic conditions, and policy choices.
Which measure of U.S. public debt matters?
“Public debt” can mean different things. When assessing effects on credit markets, the Congressional Budget Office (CBO) commonly focuses on federal debt held by the public: chiefly Treasury securities held outside the federal government. The federal government issues those securities to finance its activities and meet its obligations.
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Gross federal debt is broader. It includes debt held by the public plus Treasury securities held by federal trust funds and other government accounts. The measures are related, but they are not interchangeable. For the potential effect of federal borrowing on private borrowers and investment, debt held by the public is the more relevant measure. CBO’s February 2026 budget outlook explains the distinction.
| Measure | What it includes | Why the distinction matters |
|---|---|---|
| Debt held by the public | Federal debt held outside the federal government, mostly Treasury securities. | CBO commonly emphasizes it when discussing credit-market effects. |
| Gross federal debt | Debt held by the public plus securities held by federal trust funds and other government accounts. | It is a broader total and should not be substituted for debt held by the public in an explanation of borrowing’s market effects. |
How borrowing can affect interest rates
When the federal government borrows by selling Treasury securities, it competes with businesses and other borrowers seeking funds. If borrowing adds to the demand for funds, it can put upward pressure on long-term interest rates. Higher rates can make financing more expensive for businesses and households, and can discourage some private investment. Less investment can, over time, slow growth in output.
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The size and timing of that pressure are uncertain. Rates also respond to inflation, Federal Reserve policy, market demand for Treasury securities, and the fiscal policy that generated the debt. So a dollar of additional federal debt does not translate into a fixed or immediate increase in mortgage, credit-card, or other consumer rates.
What CBO’s estimate does—and does not—say
In a 2019 working paper, CBO estimated: “On average over the long term, each increase of 1 percentage point in federal debt as a percentage of GDP boosts interest rates by 2 to 3 basis points, CBO estimates.” Two to three basis points equal 0.02 to 0.03 percentage point. This is a long-run average estimate, not a prediction that any particular borrowing decision will move rates by that amount right away. CBO’s model analysis also finds that the response depends on the policy behind the debt: policies that encourage private capital investment or increase labor supply produce a smaller interest-rate response than policies without those incentives. CBO Working Paper 2019-01 provides the estimate and analysis.
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How interest costs affect the federal budget
The budget effect is more direct than the effect on market rates. Net interest outlays are interest payments on debt held by the public, offset by certain interest income. They depend mainly on how much debt is held by the public and the average interest rate the government pays. As Treasury securities mature and are refinanced, the rates on replacement borrowing affect the cost of servicing the debt. Deficits add to publicly held debt, and borrowing to pay interest adds to future debt-service costs.
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CBO’s February 2026 current-law baseline projects debt held by the public at 101% of GDP in 2026 and 120% in 2036. It projects net interest outlays of $1.0 trillion, or 3.3% of GDP, in 2026, rising to $2.1 trillion, or 4.6% of GDP, in 2036. CBO projects net interest to nearly equal all federal discretionary spending in 2036. These are projections, not results already observed.
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| CBO February 2026 current-law baseline | 2026 projection | 2036 projection |
|---|---|---|
| Debt held by the public | 101% of GDP | 120% of GDP |
| Net interest outlays | $1.0 trillion; 3.3% of GDP | $2.1 trillion; 4.6% of GDP |
The same baseline projects federal revenues of $5.6 trillion (17.5% of GDP) and outlays of $7.4 trillion (23.3% of GDP) in 2026. The gap helps show why the government borrows, but it does not predict any individual’s taxes. The outlook reflects laws in place through January 14, 2026; economic conditions and laws can change, and projections are uncertain. CBO’s 2026–2036 outlook contains the baseline and its assumptions.
Does public debt mean higher taxes or fewer services?
Not automatically. Interest payments compete in the budget with other priorities, so rising debt-service costs can narrow lawmakers’ choices about taxes and noninterest spending. But debt does not dictate a particular tax increase, program reduction, or service cut. Lawmakers can choose among tax changes, spending decisions, additional borrowing, and policies intended to affect economic growth.
The pressure is a trade-off, not a one-to-one exchange in which each dollar of interest removes a dollar from a named service. The eventual effect depends on future budget decisions and economic conditions. A smaller share of the budget available for other purposes can make it harder to expand or sustain programs, but the debt total alone cannot tell you which services will change.
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Why higher-rate scenarios are not the baseline forecast
Long-range debt projections are sensitive to interest rates. In a September 2026 CBO scenario in which rates are 1 percentage point above its extended baseline, debt reaches 222% of GDP in fiscal year 2056—47 percentage points above that extended baseline. This is a conditional illustration of what could happen under that rate assumption, not CBO’s central forecast. CBO’s September 24, 2026 alternative-scenarios analysis sets out the scenario.
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That distinction matters: a baseline describes projections under specified assumptions, while a scenario tests how results change when an assumption differs. Neither is a guarantee of future taxes, interest rates, or service levels. CBO’s presentation on the effects of federal borrowing on interest rates and Treasury markets also discusses the longer-run market effects and budget trade-offs.
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