US debt hits $40 trillion: Who does Washington owe and why does it matter?

The total debt of the United States has surpassed $40 trillion for the first time in history, according to a Department of the Treasury update on Wednesday.

Ballooning debt, especially during President Donald Trump’s second term, which began in January last year, has been raising concerns about a looming fiscal crisis for some time, with economists fearing a toxic combination of heavy borrowing, increased spending and lower taxes could land the world’s biggest economy in crisis.

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Fast-rising US debt comes despite Trump’s championing of cost-cutting and efficiency as a hallmark of his second term, with the nongovernmental Department of Government Efficiency (DOGE) slashing between 250,000 and 350,000 federal jobs and cutting global aid since the start of last year.

In May 2023, the Congressional Budget Office (CBO) predicted that the US would reach the $40 trillion mark in 2028.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget (CRFB), a budget watchdog, said in a statement, “$40 trillion of debt doesn’t exist solely on the government’s ledgers; it is felt throughout the economy and finds its way to the pocketbooks of people one way or another.”

Here’s what we know about why US debt is rising, and why it matters:

How fast is debt rising?

US debt is growing much faster in the 2020s than it did in previous decades.

Total debt, which includes debt owed to others and what the government owes itself, has doubled since January 2017, when Trump began his first term as president. US debt at the time was $19.95 trillion.

During Trump’s first term, public debt rose by $7.8 trillion, most of it because of the cost of the COVID-19 pandemic response. Since his return to office in January 2025, debt has grown by $3.8 trillion, amounting to a total of $11.6 trillion across his two terms so far.

Under the Biden administration from 2021 to 2025, the government continued to borrow and spend heavily in response to the pandemic; debt rose by $8.4 trillion.

US debt hit $39 trillion in March this year, meaning it took fewer than five months to pile on an additional $1 trillion in debt.

For comparison, it took close to 200 years for total US debt to cross $1 trillion for the first time in 1981, according to analysis by CRFB, although $1 trillion in 1981 would be worth $3.67 trillion in real terms today, after inflation is taken into account.

The CBO estimates that debt will rise from 101 percent of gross domestic product (GDP) in 2026 to 120 percent in 2036. That is well above the previous US record of 106 percent after World War II.

Why is debt ballooning?

Crisis spending

There have been two major crises in nearly two decades, during which governments have needed to borrow and increase spending.

The 2007-09 recession was the first crisis, while the second was the 2020-23 COVID-19 pandemic, which is linked to about one-third of the debt run up since 2017, as borrowing under both the Trump and Joe Biden presidencies intensified.

Tax revenue too low

Analysts say another reason for rising borrowing is that tax and other revenues are not keeping up with spending, especially as the US is spending more to fund pensions and healthcare for an ageing population.

Experts say Democratic and Republican administrations alike have failed to rein in spending or raise taxes to close this gap.

The US spends about $7 trillion annually, with about 60 percent of that going to Social Security Administration (SSA) payments, health insurance including Medicare and Medicaid, and veterans’ care.

Revenues are inadequate to meet these expenses. For example, in July, the US brought in $334bn in individual income taxes, social insurance, corporate taxes and others, according to the Treasury Department.

However, it paid out $766bn, almost double the revenue, in social security, health insurance, national defence and interest payments.

Rising interest rates

Interest rates remained low until the pandemic hit, at which point the Federal Reserve raised rates to fight inflation.

Now, the US is paying about $1.1 trillion annually to service its debt, slightly more than it spends on defence. In the first 10 months of the 2026 budget year, interest costs have also eclipsed health insurance spending and are now the second-largest slice of spending after pensions. It spends between $1.8 trillion and $2 trillion per year on federal retirement benefits – Social Security – and state or local public pensions combined, according to data from analysis group USA Facts.

What tax cuts has Trump introduced

Despite these rising costs, Trump has implemented deep tax cuts for businesses, starting with his Tax Cuts and Jobs Act of 2017 during his first term, which slashed the corporate tax rate from 35 percent to 21 percent.

He followed that up in 2025 with his “One Beautiful Bill Act”, permanently entrenching the 2017 law. Although the bill also cut Medicaid spending by 12 percent, it raised the debt ceiling by nearly $5 trillion to allow for this.

At present, individual income taxes make up roughly half of federal revenues, compared with only 9 percent from corporate income taxes.

In between the two Trump presidencies, the Biden administration also spent heavily on infrastructure investment and clean energy subsidies.

Who is the US in debt to?

Public debt borrowed from domestic and foreign investors makes up 80 percent – roughly $32 trillion – of the gross debt, according to Treasury data.

About $21 trillion of this public debt is owed domestically, to a variety of creditors including the Federal Reserve ($4.528 trillion), which buys and sells Treasury securities to influence federal interest rates and manage the money supply, according to analysis by the Peter G Peterson Foundation.

Other creditors are mutual funds ($5.195 trillion), pension funds ($1.135 trillion), state and local governments ($1.636 trillion), commercial banks and depository Institutions ($2.083 trillion) and other corporate and individual lenders ($6.660 trillion).

Internationally, the US is in debt to several countries and private investors. In 1970, total foreign debt holders accounted for 5 percent of gross debt, but by 2025, they made up 32 percent. That means while they are helping boost US economic activity, more of the country’s income is being sent abroad in the form of interest payments.

By 2025, the US owed Japan $1.203 trillion, the United Kingdom ($889bn), China ($683bn), as well as more than 30 other entities.

Separately, another 20 percent of the gross national debt – about $8 trillion – is owed intra-governmentally and therefore does not affect overall finances.

What does rising debt mean for the US economy?

Analysts say the rising debt could potentially create an economic crisis for the US, in the form of hyperinflation or higher interest rates, for example, if it goes unchecked.

As more debt piles on, there is a growing risk that private investment will fall because of safety concerns, and as a consequence, economic growth could slow down.

Lawmakers may eventually be forced to respond with painful austerity measures such as higher taxes, analysts say. Social safety net programmes could also be at risk.

It could take years to resolve, experts warn, and the consequences could be intergenerational, with young people forced to pay more for many years.

The rest of the world would be affected too: the US is a cornerstone of the global economy, and a crisis there will likely hurt global markets.

The first correcting step, MacGuineas of CRFB said, is to commit to zero new borrowing immediately. Lawmakers must also set up a bipartisan fiscal commission to scrutinise the issues, she said. With a commitment to keep taxes low and reduce spending, while also engaging in a hugely expensive war in the Middle East, this may be difficult to achieve, analysts say.

Reporting originally appeared via Al Jazeera. Read the full source for additional context.