The $29 trillion federal debt held by the public is becoming an increasingly local problem. Washington's fiscal challenges have led to increased borrowing costs as well as reduced federal aid to states, cities, and other local governments—who may soon have to reconsider their budgets as they face a difficult choice: cut services, raise taxes, dip into reserves, or incur further debt.
Based on estimates done before the latest reconciliation bill (the One Big Beautiful Bill Act, which is expected to significantly deteriorate the country's fiscal outlook), the federal debt is expected to grow from 124 percent of gross domestic product (GDP) in 2025 to 135 percent in 2035, which means that the federal government will absorb an increasingly larger share of the economy and capital markets.
As a result, investable capital will flow at increasing rates to U.S. debt, making it necessary for other borrowers—including state and local governments—to offer higher interest rates on their bonds to compete with U.S. Treasury debt.
