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Economy

US national debt tops GDP for first time since World War II

The United States’ national debt reached $39.7 trillion in July 2026, exceeding 100% of GDP for the first time since World War II, driven by tax cuts, pension costs and rising healthcare spending.

Source: Council on Foreign Relations · August 19, 2026 at 12:01 AM · AI-assisted report

Opinion
US national debt tops GDP for first time since World War II
Image: cfr.org

KUALA LUMPUR, 19 AUGUST 2026 —

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The United States’ national debt reached $39.7 trillion in July 2026, exceeding 100% of GDP for the first time since World War II, driven by tax cuts, pension costs and rising healthcare spending.

Market Impact

The milestone arrives as the dollar’s reserve-currency status—historically a buffer against high debt—shows cracks. Low borrowing costs have long let Washington run larger deficits at manageable rates, yet recent episodes reveal that advantage is no longer guaranteed. When market stress flared, Treasury yields rose instead of falling, signalling that the era of cheap debt may be ending.

Interest payments on the debt now rank as the second-largest federal outlay after Social Security, consuming a growing share of tax revenue and squeezing other priorities. Despite the mounting costs, political action remains slow, amplifying both economic and fiscal risks.

The US is not alone. Global sovereign debt climbed to $348 trillion in 2025, and the political fallout is already visible. In Senegal, the 2024 election of a youth-led pro-democracy coalition exposed hidden liabilities of $13 billion—equal to 132% of GDP—under the previous administration.

President Bassirou Diomaye Faye sought IMF restructuring but faced resistance from Prime Minister Ousmane Sonko, who labelled the process “a disgrace.” Sonko’s subsequent dismissal and swift election as parliament speaker exposed deep fractures within the ruling coalition.

Negotiations with the IMF continue while Faye raises taxes and tightens spending. Protests have flared repeatedly since 2024, including deadly clashes in February 2025 over unpaid student aid, illustrating how debt-driven austerity can destabilise fragile democracies.

Asia offers little comfort. Indonesia’s growth, averaging 4.2% annually over the past decade, has slowed under President Prabowo Subianto’s populist spending and rising energy costs. The budget deficit has widened to just under the 3% ceiling, while independent economists allege GDP data manipulation. The rupiah’s credibility has suffered: the main stock index is down more than 25% since January 2026, the world’s worst performance among major markets.

Institutional decay has consequences. In 2025, President Donald Trump dismissed the Bureau of Labor Statistics commissioner after a jobs report he called “rigged.” Analysis by Moody’s and S&P attributed a $20 billion hit to investment and heightened uncertainty, demonstrating how political interference in statistics can erode confidence.

Even advanced economies face similar pressures. In the United Kingdom, a cadre of bond vigilantes—large institutional investors—has shaped policy since 2022. When Prime Minister Liz Truss proposed unfunded tax cuts, vigilantes drove two-year gilt yields up by half a percentage point in a single day, forcing her resignation after 45 days. Her successor, Andy Burnham, now reportedly calibrates policy to bond-market reactions.

The US has long relied on the dollar’s reserve status to mute such reactions, but recent episodes suggest that shield is thinning. On April 2, 2025, the administration’s announcement of Liberation Day tariffs triggered the sharpest two-year Treasury-note yield surge since 2009, prompting an immediate pause and revealing the sensitivity of global investors to perceived fiscal missteps.

These cases show how debt can hijack politics. The policy response in Washington has so far favoured short-term relief over structural repair, leaving the country vulnerable to sudden shifts in investor sentiment.

Two avenues could place public finances on a firmer footing. Raising revenue is the more conventional route: US tax collections equal 27% of GDP, well below the 34% OECD average. Closing loopholes could yield significant gains; reforming capital gains taxation alone could net an estimated $1.8 trillion over a decade.

A second, less obvious path is to spend more, but more effectively. Universal childcare, paid leave and expanded public health insurance can raise productivity, growth and living standards, easing the debt burden over time. Each programme has been shown to deliver returns that exceed costs, strengthening the economy’s capacity to service debt without deeper austerity.

The warning signs are already visible. Senegal’s political convulsions, Indonesia’s market rout, and Britain’s bond vigilantes illustrate what happens when debt becomes a political weapon rather than a policy tool. The US still has time to act, but the window is closing.

Related: Prime Minister

Reporting based on Council on Foreign Relations. Figures and claims are subject to revision as the story develops. DomainFork publishes editorial context, not investment advice — see our editorial standards.