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U.S. federal borrowing can put upward pressure on long-term interest rates, and rising interest payments can leave lawmakers with less room in the budget for other priorities. But debt does not automatically trigger a particular tax increase, program cut, or jump in your mortgage or credit-card rate. The effects depend on economic conditions, interest rates, the policies behind the borrowing, and future decisions by Congress. For credit-market effects, the Congressional Budget Office (CBO) generally focuses on federal debt held by the public—not gross federal debt.
What does “public debt” mean?
Federal debt is not a single interchangeable number. The distinction matters because the measure used to discuss borrowing in financial markets is not the same as the broad total often called gross federal debt.
| Measure | What it includes | Why it matters here |
|---|---|---|
| Federal debt held by the public | Treasury securities held by investors and entities outside the federal government, including households, financial institutions, and foreign holders. | This is the measure CBO commonly emphasizes when analyzing how federal borrowing affects credit markets, interest rates, and private investment. |
| Gross federal debt | Debt held by the public plus Treasury securities held by federal trust funds and other government accounts. | It is a broader measure. Do not substitute it for debt held by the public when discussing the market effects of federal borrowing. |
CBO’s February 2026 budget outlook explains these measures and provides the current-law projections discussed below. Those projections reflect laws in effect through January 14, 2026; they are estimates, not outcomes already observed, and can change as laws and economic conditions change.
Does government borrowing raise interest rates?
It can put upward pressure on long-term rates. When the Treasury sells securities to finance federal activity and maturing liabilities, the government is borrowing from investors who could otherwise lend or invest elsewhere. If federal borrowing adds to demand for available funds, the cost of borrowing across the economy can rise. Higher rates can make it more expensive for businesses to finance equipment, buildings, and other investments. If that reduces private investment, it can slow the growth of productive capacity and output over time.
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The size and timing of the effect are uncertain. Interest rates also respond to inflation expectations, Federal Reserve policy, economic conditions, demand for Treasury securities, and the type of fiscal policy that creates the debt. CBO’s March 2025 overview discusses these longer-run effects and the trade-offs facing budget policymakers in Effects of Federal Borrowing on Interest Rates and Treasury Markets.
What CBO’s estimate does—and does not—say
In a March 2019 working paper, CBO estimated that, “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.” A basis point is one-hundredth of a percentage point, so the estimate is an average long-run relationship—not a prediction that every additional dollar of debt immediately raises a household’s loan rate by a fixed amount. The paper also finds that the rate response depends on fiscal policy: policies that encourage private capital investment or additional labor supply produce a smaller response in CBO’s model than policies without those incentives. See The Effect of Government Debt on Interest Rates: Working Paper 2019-01.
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For households, this means federal borrowing may contribute to the broader interest-rate environment, but it is not a stand-alone rate-setting rule for mortgages, car loans, credit cards, or savings accounts. Those rates reflect multiple forces, and the CBO estimate does not specify a direct pass-through to any particular consumer product.
How do interest costs affect the federal budget?
The budgetary link is more direct than the link between federal borrowing and any one consumer interest rate. Net interest outlays are interest payments on debt held by the public, offset by certain interest income. They depend mainly on how much publicly held debt there is and the average interest rate paid on it. As Treasury securities mature and are refinanced, the rates on replacement borrowing affect the government’s interest bill. Deficits add to debt held by the public, and borrowing to cover interest costs adds to 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 baseline projections, not recorded future results; they depend on the laws and economic assumptions in the outlook. The figures are in CBO’s 2026 to 2036 outlook.
Why the revenue-spending gap matters
In the same 2026 baseline, CBO projects federal revenues of $5.6 trillion, or 17.5% of GDP, and outlays of $7.4 trillion, or 23.3% of GDP. The projected difference helps explain why borrowing is needed under that baseline; it does not predict what any individual taxpayer will owe. Revenue and outlay levels are projections, not a personal tax calculation.
Does public debt mean higher taxes?
Not by itself. Debt service has to be financed, but the debt stock does not mechanically dictate a specific tax increase. Congress can choose among raising revenues, changing spending, borrowing more, or adopting policies intended to affect economic growth. The balance of those choices is a political and budget decision, not an automatic consequence of crossing a particular debt level.
Higher interest costs can nonetheless narrow the options. If more revenue is used to pay interest, less is available for other spending unless lawmakers raise taxes, borrow more, or reduce other outlays. Conversely, tax and spending choices that change deficits affect future borrowing and interest costs. CBO’s 2025 overview of federal borrowing and Treasury markets discusses the connection between interest costs and budget trade-offs.
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Does interest on the debt crowd out government services?
It can create pressure on the rest of the budget, but there is no automatic one-for-one cut to a named service. Interest payments are part of federal outlays; when they grow, lawmakers have less budget flexibility if they want to keep total borrowing from rising. They may decide to reduce or limit other spending, raise revenue, borrow more, or change policy in ways intended to support growth. The resulting effect on services depends on those choices.
It is also useful to distinguish budget pressure from private-investment crowding out. In the first case, interest costs compete with other federal priorities for budget resources. In the second, additional government borrowing may contribute to higher market rates and reduce some private investment. The channels are related but not identical, and neither implies a specific service cut or a guaranteed change in household borrowing costs.
How to read CBO’s projections and higher-rate scenario
A baseline is a conditional projection based on specified laws and economic assumptions, not a promise about what will happen. Scenario analysis asks what could happen if an assumption changes; it should not be read as the central forecast.
In a September 2026 scenario, CBO considered interest rates 1 percentage point above its extended baseline. In that conditional scenario, debt reaches 222% of GDP in fiscal year 2056—47 percentage points above the extended baseline. This is an illustration of how sensitive long-run debt can be to a sustained rate difference, not CBO’s forecast. The results appear in Projections of Deficits and Debt Under Alternative Scenarios for Interest Rates and the Budget.
The February 2026 baseline, the 2019 long-run rate estimate, and the September 2026 scenario answer different questions: what CBO projects under current law, what its long-run analysis estimates on average, and what could occur under a specified higher-rate assumption. Keeping those distinctions clear prevents a scenario or an average estimate from being mistaken for a near-term prediction.
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