US Federal Debt Nears $40 Trillion; CBO Sees FY2026 Net Interest Above $1 Trillion

As August begins, the total US federal debt is approaching the $40 trillion mark. According to Treasury accounts, the outstanding federal debt balance on July 30 stood at $39.84 trillion, just about $159 billion short of $40 trillion. Based on an average daily increase of about $12.6 billion over the past month, it is all but certain that total US debt will exceed $40 trillion in August.

Separate calculations show that the average interest rate on US Treasury debt has reached 3.41%, the highest level since 2009.

US debt has been growing faster than the economy. The US government faces fiscal sustainability challenges, with interest payments taking up a rising share of revenue, and it is unable to cut mandatory spending on Social Security, Medicare, and defense.

At its July monetary policy meeting, the Federal Reserve kept its policy rate range at 3.5% to 3.75% and continued its reserve management purchases (RMP) of short-term Treasuries. The US Treasury has been issuing large amounts of short-term debt to cover funding gaps, concentrating repayment pressure in the near term and making fiscal costs directly track the Fed's short-term rate.

The Congressional Budget Office (CBO) projects that debt held by the public as a share of GDP will rise significantly from the end of 2025 through 2036, with the fiscal deficit remaining at a high 5.8% to 6.7% of GDP over the same period. Interest payments will become the second-largest mandatory expenditure in the federal budget, after Social Security.

As for the impact of implicit default, domestically, mandatory spending on interest, Social Security, and Medicare will gradually crowd out room for defense, infrastructure, scientific research, and emergency relief, leaving the government with increasingly limited fiscal flexibility.