Kathmandu— The total debt of the United States surpassed $40 trillion this week, a historic milestone driven by increased government borrowing, spending initiatives under both Democratic and Republican administrations, and substantial tax cuts. The surge in debt, particularly during President Trump’s second term, has sparked concerns among economists about potential fiscal instability for the world's largest economy. This increase comes despite efforts to cut federal jobs and global aid, raising questions about the sustainability of current economic policies and their long-term impact on both domestic and international markets.

Debt Growth: A Historical Perspective

US debt is accelerating at a rate unseen in recent decades. Total debt has doubled since January 2017, when it stood at $19.95 trillion. During President Trump’s first term, public debt increased by $7.8 trillion, largely due to the costs associated with responding to the COVID-19 pandemic. Since his return to office in January 2025, an additional $3.8 trillion has been added, bringing the total increase across both terms to $11.6 trillion. The Biden administration also contributed significantly, with debt rising by $8.4 trillion between 2021 and 2025 as it continued pandemic-related spending and invested in infrastructure.

Factors Driving the Increase

Two major economic crises – the 2007-09 recession and the 2020-23 COVID-19 pandemic – necessitated substantial government borrowing and increased spending. However, analysts also point to a structural issue: tax revenues are not keeping pace with expenditures, particularly as an aging population requires greater funding for pensions and healthcare. Both Democratic and Republican administrations have been criticized for failing to address this gap through spending cuts or tax increases. The US currently spends approximately $7 trillion annually, with the largest portions allocated to Social Security, health insurance programs like Medicare and Medicaid, and veterans’ care.

Trump's Tax Policies and Debt

President Trump implemented significant tax cuts during his first term with the Tax Cuts and Jobs Act of 2017, which lowered the corporate tax rate from 35 percent to 21 percent. He further solidified these changes in 2025 with the “One Beautiful Bill Act,” permanently enshrining the 2017 law while also raising the debt ceiling by nearly $5 trillion. Currently, individual income taxes comprise roughly half of federal revenues, while corporate income taxes account for only 9 percent. In contrast, the Biden administration pursued infrastructure investment and clean energy subsidies during its term.

Who Holds US Debt?

Approximately 80 percent – or $32 trillion – of the gross debt is held as public debt by both domestic and foreign investors. Domestically, major creditors include the Federal Reserve ($4.528 trillion), mutual funds ($5.195 trillion), pension funds ($1.135 trillion), state and local governments ($1.636 trillion), commercial banks ($2.083 trillion) and individual lenders ($6.660 trillion). Internationally, the US owes significant amounts to countries like Japan ($1.203 trillion), the United Kingdom ($889 billion), and China ($683 billion) as of 2025. An additional 20 percent of the debt is held intra-governmentally.

Potential Economic Consequences

Analysts warn that unchecked rising debt could lead to economic instability, potentially manifesting as hyperinflation or higher interest rates. Increased debt may also discourage private investment and slow economic growth. Lawmakers might eventually be forced to implement austerity measures such as tax increases or cuts to social safety net programs. Maya MacGuineas, president of the Committee for a Responsible Federal Budget (CRFB), emphasized that “$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.”

Addressing this escalating debt requires immediate action, including a commitment to reduce new borrowing and the establishment of a bipartisan fiscal commission to thoroughly examine the issues. However, balancing these goals with ongoing commitments like low taxes and military spending presents significant challenges.

(With inputs from Al Jazeera)

Originally published on abcnews.com.np.