CBO Warns Higher Interest Rates Could Add $6 Trillion to US Deficits
A Congressional Budget Office analysis finds that interest rates 150 basis points above its baseline would increase U.S. deficits by $6.0 trillion through 2036, pushing public debt to 133.1% of GDP.
The Congressional Budget Office projects that higher interest rates would significantly increase U.S. deficits and debt through 2036. Under a scenario where interest rates are 150 basis points higher than its February 2026 baseline, deficits would be $6.0 trillion larger over the 2026-2036 period, with debt held by the public reaching 133.1% of GDP by the end of that span.
A less severe scenario, with rates 50 basis points above baseline, would still increase deficits by $1.9 trillion, pushing the debt-to-GDP ratio to 124.4% in 2036. The CBO released its analysis, titled 'Projections of Deficits and Debt Under Two Scenarios With Higher Interest Rates,' on October 8, 2026.
Current market rates exceed CBO’s earlier assumptions
The report's fiscal warnings arrive as market rates already outpace the agency's earlier assumptions. On the day of the report's release, the 10-year Treasury note yield closed at 5.2 percent. That is nearly a full percentage point above the 4.3 percent average the CBO projected for the 2026-2036 period in its February baseline. The 3-month Treasury rate also closed about 95 basis points higher than those prior projections.
| Scenario (vs. Baseline) | Avg. 10-Year Treasury Rate (2026-2036) | Deficit Increase (2026-2036) | Debt-to-GDP in 2036 |
|---|---|---|---|
| 50 basis points higher | 4.8% | $1.9 trillion | 124.4% |
| 150 basis points higher | 5.8% | $6.0 trillion | 133.1% |
The baseline projection already shows debt held by the public rising from 100.6% of GDP in 2026 to 120.2% in 2036. The higher-rate scenarios would add 4.2 and 12.9 percentage points, respectively, to that already steep trajectory.
Interest rate effects drive most of the deficit increase
In both scenarios, the direct cost of borrowing is the primary driver of wider deficits. About five-sixths of the projected deficit increase stems from higher net interest costs. The remaining one-sixth comes from increased debt-service costs, which arise because the government must borrow more to cover the added interest expenses.
For the 150-basis-point scenario, the net interest cost increase totals $4.9 trillion, with an additional $1.1 trillion from debt-service costs. In the 50-basis-point scenario, the increases are $1.6 trillion and $297 billion, respectively.
Analysis includes limitations and broader fiscal context
The CBO notes its estimates have important limitations. They do not account for potential economic effects of higher interest rates on GDP growth. The budgetary impacts also depend on the unspecified reasons for the rate increases, which could cause additional effects. The analysis assumes all other economic variables remain as in the baseline projections.
Despite these caveats, the agency shows the severe fiscal strain. "Every dollar spent on interest is a dollar not available for other purposes and can contribute to a debt spiral," the CBO stated. High interest rates create affordability challenges and amplify risks to an already unsustainable fiscal outlook. Deficits could grow to as high as 8.8% of GDP by 2036 under the more severe rate scenario.
The CBO said it "analyzed the budgetary outcomes under two alternative scenarios in which interest rates are higher than those underlying the agency’s February 2026 baseline budget projections." The agency suggests that reducing deficits toward 3% of GDP would put downward pressure on interest rates and reduce vulnerability to future rate increases. Policymakers should act promptly to put debt on a sustainable path.
