U.S. Treasury will begin steps to avoid debt default as Trump takes office

As President-elect Donald Trump prepares to take office, the U.S. government’s fiscal health is bleak, Congress’s nonpartisan bookkeeper reported Friday, with debt and deficits set to reach record levels and the nation up against its borrowing limit.

By 2035, the federal government will spend $2.7 trillion more than it collects in revenue, an all-time high for annual deficits, the Congressional Budget Office projected. That level of borrowing will mean the total debt held by the public will hit $52 trillion, or 118.5 percent of the nation’s annual economic output. That would far surpass the record set in the aftermath of World War II.

And as soon as Tuesday, the Treasury Department will begin “extraordinary measures” to prevent the federal government from defaulting on its debts, making one of the incoming Trump administration’s first acts a grim reminder of the country’s unstable balance sheet.

The United States technically breached its debt ceiling, the amount the government can borrow to pay its bills, on Jan. 1, but some accounting quirks kept federal accounts below the limit for another few weeks. Now officials will also need to postpone investments into certain federal retirement accounts to keep enough liquidity available to pay creditors beginning Tuesday.

“The debt limit does not authorize new spending, but it creates a risk that the federal government might not be able to finance its existing legal obligations that Congresses and presidents of both parties have made in the past,” Treasury Secretary Janet L. Yellen wrote to House Speaker Mike Johnson (R-Louisiana) on Friday. “I respectfully urge Congress to act promptly to protect the full faith and credit of the United States.”

CBO’s report casts new light on the financial conditions facing Trump and congressional Republicans with unified control of Washington. The GOP has grand plans to green-light a nearly $5 trillion tax cut along party lines, plus hundreds of billions of dollars more in border security and national defense spending.

But the party’s ambitions are running up against a stark reality: More borrowing will have dire consequences for the nation’s balance sheet and could upset the resilient U.S. economy that’s flying high after its pandemic rebound.

“I am concerned, because several times the Treasury of the United States has been called upon to save the nation,” Scott Bessent, Trump’s pick for treasury secretary, said this week about the debt in a confirmation hearing. “Whether it was the Civil War, the Great Depression, World War II or the recent covid epidemic, Treasury - along with the full government and Congress - has used its borrowing capacity to save the union, to save the world and to save the American people. What we currently have now, we would be hard-pressed to do the same.”

Most of the growth in debt comes from new spending on social safety-net programs related to demographic changes: As baby boomers retire en masse, they’re placing increasing strain on Social Security and Medicare, which are set to go insolvent within the next decade.

Entitlement program spending - and higher interest costs as borrowing increases - are the main drivers of skyrocketing federal outlays, CBO said.

The projections are based on an unlikely best-case picture. The forecast assumes significant portions of Trump’s 2017 tax cut law will expire at the end of 2025, giving the Treasury a big burst of new income. That’s what the law says now, but Trump and members of Congress are racing to extend the cuts. If they expire, most Americans will face a major tax increase next year.

Republicans are in negotiations to extend that law and search for spending cuts to offset the cost. The CBO report Friday didn’t explore what would happen under new tax laws.

“Today’s report shows a daunting outlook, but the good news is that there are many policy solutions available to address our fiscal challenges. As we approach Inauguration Day, our leaders have a new opportunity to secure America’s economic future by putting us on a stronger, more sustainable fiscal trajectory,” said Michael A. Peterson, chief executive of the Peter G. Peterson Foundation, a fiscal policy think tank.

Staff from the GOP-controlled House Budget Committee have in recent days circulated a 50-page menu of options to consider in a party-line tax bill, which Republicans hope to run through procedural maneuvers to head off a Senate filibuster.

But in the Senate, lawmakers are increasingly interested in an accounting strategy that would officially discount any new tax cut’s impact on the national debt by assuming for budget purposes that the tax law - and lower revenue - would continue. That plan would reduce the amount of cuts lawmakers need to find.

Experts are wary about how U.S. lenders would feel about such a move, though. Bond purchasers are already demanding higher interest rates on U.S. debt because of the federal fiscal picture and Congress’s borrowing trajectory.

The yield on a 30-year Treasury bond traded at close to 5 percent interest on Friday, the highest mark since 2007, before the economy began to feel jitters ahead of the Great Recession.

That financial picture, Democrats say, should lead Republicans to restrain new tax cuts and raise revenue through higher levies on wealthy individuals and major corporations.

Trump has called for new tariffs on imports to bring in additional money to federal coffers and offset new tax cuts. That could help the Treasury, but most economists say the cost of the tariffs will be passed on to consumers, similar to a sales tax.

“The CBO baseline includes the expiration of the 2017 Republican tax cuts, which overwhelming benefited the wealthy,” Rep. Brendan Boyle (Pennsylvania), the top Democrat on the House Budget Committee, said in a statement. “Yet Republicans are determined to extend these reckless giveaways to the ultrarich, adding $4.6 trillion to the deficit. Instead of prioritizing working families, they focus on handouts for billionaires, leaving everyday Americans to pay the price.”