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Thinking the US can grow out of its debt burden is wishful thinking
Malin Rosengren, Investment Grade Portfolio Manager, discusses the fiscal risks in President Trump’s ‘One Big Beautiful Bill Act’, and looks at how any potential US economic underperformance would have severe implications on fiscal ratios and the trajectory of the country’s debt dynamics.
Key takeaways
- History shows the US is unlikely to achieve the required 6.9% average nominal GDP growth annually over the ten-year budget horizon needed to stabilise its debt-to-GDP ratio while running the primary deficits set in Trump’s One Big Beautiful Bill Act.
- Slowing US population growth and the exit of baby boomers from the labour market implies strong economic growth does not necessarily reduce the deficit one-for-one: growth of the largest cost centre for the government (entitlement programs) will structurally outpace its revenue base (tax receipts).
- The growth risk underlying US debt sustainability is markedly asymmetric and skewed to the downside.
- This implies yield curve steepening pressures will persist, and any indication of softer growth should see a sharp acceleration in steepening momentum.
The US would have to achieve an average 6.9% nominal GDP growth annually over the ten-year budget horizon in order to stabilise its debt-to-GDP ratio, while running the primary deficits set in Trump’s One Big Beautiful Bill Act (OBBBA). Growth at that level hasn’t been consistently achieved in the US over the last forty years – and when there has been a period of nominal growth at that level it has been followed by a sharp slowdown in subsequent years (Chart 1). That sets a fairly high bar for growth to stabilise debt at current levels, let alone outperform to begin ‘growing out’ of the government’s accumulated debt stock.
Chart 1: US GDP nominal growth year-on-year
Source: Bloomberg, as at July 2025.
Demographics are also important to consider
Population growth is on the decline in the US. The Congressional Budget Office’s (CBO) Demographic Outlook for 2025 projects the natural growth rate of the population to turn negative by 2033 (i.e. annual deaths in excess of annual births) (Chart 2), at which point the US population would begin to shrink without net immigration growth. That is a significant structural counter-weight to any future gains to potential GDP growth in the US – especially in the context of Trump’s aggressive anti-immigration policies.
Chart 2: Population growth and contributing factors
Source: The Demographic Outlook (2025-2055).
Growth of the labour force is set to slow even more than population growth over the coming decade as baby boomers shift into retirement (Charts 3 and 4). The structural ageing of the population implies a smaller potential revenue base (tax receipts) and greater required expenditure (entitlement programs). In other words, strong economic growth does not necessarily reduce the deficit one-for-one as the growth of the largest cost centre for the government will structurally outpace its revenue base. Indeed, the dependency ratio – the number of retirement age people per 100 working age people – is set to rise from 35.8 in 2024 to 42.0 in 2032, the same year Social Security is to reach insolvency (Chart 5).
Chart 3: Population and labour force growth, 10-year compound average annual rates, for selected periods and 2023-33 projected
Source: US Bureau of Labor Statistics - Monthly Labor Review.
Chart 4: Age group as a percentage of the overall population, 2003, 2013, 2023 and 2033 projected
Source: US Bureau of Labor Statistics - Monthly Labor Review.
Chart 5: The ratio of old age to working age people will grow 26% over the next 30 years
Source: U.S. Population Growth Is Slowing Down — Here’s What That Means for the Federal Budget.
No margin for error – the real asymmetric risk
Trump’s OBBBA targets fiscal deficits of 6.5-7.0% GDP annually over the next ten years under an assumption for stellar growth exceeding trend annually over the period. But what happens if growth softens?
Over the last 40 years, automatic stabilisers have averaged -0.8 percentage points of potential GDP in years where GDP growth has underperformed, according to CBO data. That would already push the primary deficit out towards 4% GDP without any changes made to the budget or additional spending measures. This is the real danger: the degree of pro-cyclicality of the US fiscal position. Running a fiscal deficit near 7% GDP when the economy is strong and unemployment is low implies that any economic downturn will blow out the budget, and policy space to respond will be constrained (Chart 6). There is no margin of error left for fiscal policy to step in to help stimulate the economy in any case of weakness.
The US fiscal position is indeed exposed to economic growth performance, however risk is asymmetric and heavily skewed to the downside. While above trend growth has already been baked into the budget figures and therefore results in a less material fiscal outperformance versus targets, any economic underperformance would have severe implications on fiscal ratios and the trajectory of US debt dynamics.
While there is certainly an argument to be made for potential gains from a productivity-enhancing AI boom and deregulation efforts in the US, this has arguably already fed into the growth assumptions behind the budget.
At this point, the best thing Trump can do for fiscal policy is avoid a TACO on tariffs and ensure those additional revenues are large enough to have a meaningful impact. As it stands, if we annualise tariff revenues accrued in the month of June it would add USD245 billion, or around 1% of GDP, in additional revenues towards the budget’s bottom line. Although I’ve accounted for this revenue boost in the fiscal estimates, any ramp up in tariffs from here would continue to benefit the fiscal outlook.
Chart 6: The degree of pro-cyclicality of fiscal policy
Source: Bloomberg, as at July 2025.
What does this mean for markets?
The market has seemingly shrugged off the fiscal risks imbued in the passage of Trump’s OBBBA – with many arguing the US can easily grow out of its fiscal dilemma. I disagree. The growth risk underlying US debt sustainability is markedly asymmetric and skewed to the downside. This implies yield curve steepening pressures will persist, and any indication of softer growth should see a sharp acceleration in steepening momentum. We continue to like 2s30s curve steepeners and look for the curve to approach levels closer to 200bps.
All data is Bloomberg, unless otherwise stated.
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