Under Trump, deficits remain high while borrowing costs escalate

WASHINGTON, Oct 19 (Reuters) - US government debt hit a milestone $40 trillion in August, triggering a potentially uncomfortable debate for President Donald Trump and Republicans contesting tight midterm elections next month: whether the world's No. 1 economy is also becoming a riskier credit in financial markets.

World bond markets ‌are driving borrowing costs higher for everyone, and analysts say that the "term premium" – or the return required on a bond tied to the borrower's perceived credit quality – does not ‌seem to show worrisome increases for the United States.

Yet risks remain, analysts say, in part because the Trump administration has not taken concrete steps to reduce US deficits or curb rising borrowing costs, beyond its promise that the US can grow its ​way out of a difficult fiscal predicament.

The administration also says its sweeping trade tariff policy will help ease fiscal pain.

These dynamics are now driving up interest rates for home mortgages and other consumer loans, ahead of the November 3 congressional elections in which polls show Republicans could lose control of the Senate and House of Representatives. Rising costs are the main issue for voters, polls show.

On Friday, the Treasury reported a roughly $2 trillion budget deficit for the fiscal year ended September 30, 12% larger than the previous year's and the biggest since the federal spending surge during the COVID-19 pandemic.

Deficits are usually meant to track ‌the business cycle.

But in the US, they never fully retreated from the ⁠pandemic era because high embedded entitlement payments, tax cuts, increased military spending and, more recently, rising interest costs pressured the government to borrow more.

The fiscal 2026 deficit was the third largest ever, with debt service costs a record $1.36 trillion.

Further, US government spending exceeded receipts by an amount equal to about 6.2% of ⁠the total economy, even as analysts say a sustainable annual deficit, given typical economic growth, is around 3%.

Some of the $40 trillion IOU includes obligations to government entities like the Social Security Trust Fund, while the total owed to Treasury bond holders is around $32 trillion – rivaling the size of the economy.

In another potential risk signal, the debt-to-GDP ratio is now around 100%, a benchmark last seen during the financing of World War ​II.

Economists ​are largely split on whether that is a problem and whether there is a tipping point. They say a ​US debt default, which would shock the global financial system, is highly unlikely.