Trump’s One Big Beautiful Bill Act that was signed into law on 4 July 2025 is expected to increase significantly the US debt-to-GDP ratio, perhaps jeopardising the stability of US public finances. In this edition of InFocus, Senior Economist GianLuigi Mandruzzato looks at alternative scenarios for growth and interest rates and at the implications for debt sustainability.
The Trump administration’s fiscal plan, enshrined in the “One Big Beautiful Bill Act” (OBBBA), raises concerns about the path of the debt-to-GDP ratio over the next decade and beyond. To assess this risk, it is useful to consider alternative scenarios for some of the key variables that affect public debt sustainability.
This note focuses on the sensitivity of the US debt-to-GDP ratio to changes in the growth rate of nominal GDP and the level of interest rates, the two principal determinants of debt sustainability. The analysis shows that under most scenarios the US debt-to-GDP ratio will rise further and highlights the importance of low interest rates to improve its sustainability.
The OBBBA increases the risks to US public finances
According to estimates by the Congressional Budget Office (CBO), between 2025 and 2034 the OBBBA will boost the public debt by USD 3.4 trillion (tn) compared to the CBO’s January 2025 estimates.1
The bigger deficit mainly reflects the fact that the OBBBA makes permanent the tax cuts for families and businesses introduced during Trump’s first term and which were due to expire in 2026. Lower tax revenues of USD 4.5tn are only partially offset by USD 1.4tn worth of cuts in green energy tax credits and health care and welfare spending. In addition, increases in spending on defence and on fighting illegal immigration of USD 280 billion (bn) have been approved.2
The increased bond issuance that will result will raise the spend on interest costs by around USD 750bn, based on the 3.9% interest rate level used in the CBO’s January 2025 estimates. This puts the overall cost of OBBBA to the public coffers at USD 4.15tn (the cumulative difference between the orange and blue lines in Figure 1).
On the basis of the average nominal GDP growth rate of 3.9% estimated by the CBO at the beginning of 2025, the OBBBA will push the debt-to-GDP ratio to 144% in 2034, almost 10 percentage points higher than the CBO’s January projection and 20 percentage points higher than at the end of 2024 (see Figure 2).
Despite the many strengths of the US economy, such a debt load would put pressure on the US Treasury’s creditworthiness, increasing the risk of further sovereign rating downgrades by the major rating agencies.3 Investors may well demand an increased risk premium to hold US assets, including US Treasury bonds and the US dollar.
A scenario analysis of the US debt-to-GDP ratio
President Trump recently argued that thanks to the OBBBA and deregulation, US economic growth will be much higher than the CBO estimates, more than offsetting the impact of the recently passed tax cuts on the public finances.4
A simple simulation partially supports this thesis. If nominal GDP growth rose to 6% annually over the next decade, the debt-to-GDP ratio would only rise to 127% in 2034 despite the increased deficit, as shown by the grey line in Figure 2.5
However, such a high growth rate may not be feasible. The Tax Foundation estimates that the OBBBA will raise nominal GDP by only 1.2% over ten years, equivalent to an increase in the annual growth rate of just 0.1%. This is partly because by extending the tax cuts that were implemented in Trump’s first term the OBBBA avoids the fiscal tightening that would have followed their expiry but does not add any new stimulus.
The actual fiscal boost to GDP growth compared to the current trend is small and mainly due to increased spending on defence and anti-immigration policies. Even anticipating the effects of the deregulation promoted by the current administration and of increased adoption of artificial intelligence, achieving a nominal GDP growth rate of 6% will be hard.
Furthermore, even if nominal GDP growth were to rise to 6% in the coming years, average Treasury bond yields would likely be higher than the 3.9% used by the CBO in its projections. Given a debt-to-GDP ratio of 124% at the end of 2024 and the larger deficit projected over the next decade, interest expenditure would increase significantly.
To assess the sensitivity of the debt-to-GDP ratio to changes in macroeconomic and financial factors, we consider two scenarios:
1. In the first scenario, shown by the light blue line in Figure 2, nominal GDP growth increases only to 5.5% instead of 6%;
2. In the second scenario, shown by the yellow line, the less favourable nominal GDP growth rate is compounded by a moderate increase of 0.50% in debt service costs compared to CBO estimates.6
The simulation results highlight the different impact of the shocks on the projected debt-to-GDP ratio. Weaker nominal GDP growth causes the debt-to-GDP ratio to increase by approximately 3.5 percentage points after ten years. If lower growth is combined with higher financing costs, the debt-toGDP ratio rises by another 5 percentage points. Notably, the impact on the US debt-to-GDP ratio of a shock to the level of interest rates is 40% larger than a similar sized shock to economic growth.
Conclusions
The final version of the “One Big Beautiful Bill Act” is expected to add USD 4.15tn to the stock of US debt over the next 10 years, according to estimates by the bipartisan Congressional Budget Office, raising the debt-to-GDP ratio to 144% in 2034 from 124% at the end of last year. However, President Trump claims that the policies implemented by the White House will raise nominal GDP growth to 6%, if not higher, thereby financing the increased deficit.
A simple simulation shows that such a high growth rate would help limit the debt-to-GDP ratio increase over the next ten years, if interest rates remain at the CBO baseline level of 3.9%. However, a moderate 0.5% increase in the cost of debt financing would add 5 percentage points to the debt ratio in 2034. The impact of increased interest rates on the debt ratio would be larger than an adverse shock to economic growth of similar size, highlighting the importance of keeping government bond yields low. This helps explain why Mr Trump is putting pressure on the Fed to cut rates.
More generally, an assessment of alternative scenarios for economic growth and the cost of debt financing shows that over the next ten years the US debt ratio will increase even under the most favourable scenarios.
Furthermore, the sensitivity of the debt ratio to moderate adverse shocks to growth and debt servicing costs suggests that investor concerns about the sustainability of US fiscal policy in the medium to long term will remain elevated. Foreign investors will likely require an increase in the risk premium that would negatively affect the medium-term returns on US assets, including US Treasury bonds and the dollar, vis-à-vis the US peers.
1See https://www.cbo.gov/system/files/2025-07/61537-hr1-Senate-passed-additional-info7-1-25.pdf The Congressional Budget Office was created in 1974 as a nonpartisan federal agency within the legislative branch of the US government to support the Congressional budget process and to help Congress make effective budget and economic policy.
2For a detailed analysis of the OBBBA measures, see https://taxfoundation.org/research/all/federal/big-beautiful-bill-senate-gop-tax-plan/
3On 30 May, 2025 Moody’s downgraded the US sovereign rating to Aa1 from Aaa, following similar steps taken by S&P Global Ratings in 2011 and by Fitch Ratings in 2023.
4See https://truthsocial.com/@realDonaldTrump/posts/114597726905289988
5It should also be considered that the larger tax base resulting from faster GDP growth would lead to higher tax revenues, which would further reduce the debt/GDP ratio compared to this estimate.
6The size of shock to the level of interest rates matches that to nominal GDP growth and thereby helps highlighting to which factor the US debt-to-GDP ratio is the most sensitive to. Given the increase in nominal GDP growth from the CBO’s baseline considered in the scenarios, interest rates would be expected to rise by significantly more than 0.50%.
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