• CBO Director Phillip Swagel warns that large deficits could push interest rates higher, creating a feedback loop that worsens the fiscal outlook.
  • A September 24 analysis shows that gradually higher rates could push publicly held debt to 222% of GDP by 2056, compared to 175% under the baseline.
  • The warning comes as the federal deficit is projected to rise from $1.9 trillion in 2026 to $3.1 trillion in 2036, with net interest costs doubling to $2.1 trillion.

A Vicious Cycle

Congress’s nonpartisan budget analyst is sounding the alarm on the nation’s fiscal path, warning that rising federal borrowing could push interest rates higher and set off a vicious cycle that strains the government’s finances.

In a September 24 letter to Senate Budget Committee ranking member Jeff Merkley, CBO Director Phillip Swagel outlined a scenario in which gradually higher interest rates lead to a snowballing debt burden. Under that scenario, publicly held federal debt would reach 222% of GDP by 2056, versus 175% under CBO’s baseline. The analysis is conditional—not a prediction—but it underscores the risks if borrowing costs continue to climb.

“The trajectory is not sustainable,” Swagel said, according to the letter.

The mechanism is straightforward: larger deficits force the government to borrow more, which can push rates higher. Higher rates, in turn, increase the government’s interest bill, requiring even more borrowing. In the higher-rate scenario, cumulative deficits over fiscal 2026–2036 would increase by approximately $1.5 trillion, and average annual GDP growth over 2026–2056 would be 0.1 percentage point slower than in the baseline.

The Numbers Behind the Warning

CBO’s February baseline already paints a bleak picture. The annual deficit is projected to rise from roughly $1.9 trillion in 2026 to $3.1 trillion in 2036, while net interest spending climbs from $1.0 trillion to $2.1 trillion. The agency attributes much of the deterioration to recent policy changes, including the 2025 reconciliation act (Public Law 119-21), which adds $4.7 trillion to cumulative deficits, partially offset by higher tariffs that reduce deficits by about $3.0 trillion and lower immigration that adds about $0.5 trillion.

Swagel’s warning is not about the Federal Reserve’s short-term policy rate. CBO explicitly distinguishes between monetary policy and longer-term borrowing costs, noting that its February forecast allowed for Fed rate cuts while longer-term Treasury rates edged higher. The September analysis assumes a gradual increase in the average interest rate on federal debt—rising by roughly five basis points annually until it reaches one percentage point above baseline—before accounting for additional economic effects.

Political and Economic Ripple Effects

The debate over fiscal policy is intensifying. The White House has challenged CBO’s growth assumptions, arguing that President Trump’s policies will reduce the deficit-to-GDP ratio. CBO projects 2.2% real growth for 2026, compared with administration expectations of 3–4%. Meanwhile, the Bipartisan Policy Center’s Jonathan Burks warned that large deficits are unusual for a growing, peacetime economy.

The implications extend beyond Washington. Higher government borrowing can crowd out private investment, leading to a smaller capital stock and slower economic growth. Taxpayers and beneficiaries of public services could face difficult trade-offs as interest payments consume a larger share of the budget. CBO’s stabilization scenario shows that holding the debt ratio at its projected 2026 level would require cumulative primary deficits over 2026–2036 to be approximately $7.3 trillion smaller than baseline.

What to Watch

The immediate focus is CBO’s September 2026 Monthly Budget Review, scheduled for release on October 8. The report will provide the latest actual budget figures, which could diverge from projections. Longer term, the key variables are the primary deficit, economic growth, and the government’s average borrowing cost.

CBO’s analysis also highlights the looming exhaustion of the Social Security Old-Age and Survivors Insurance Trust Fund in 2032, adding further pressure on lawmakers to address entitlement spending. For now, Swagel’s message is clear: without a change in course, the fiscal trajectory poses a growing risk to the economy.

Correction: An earlier version misstated the year of the CBO’s Monthly Budget Review. It is September 2026, not October.