Can Growth Fix U.S. Debt? CBO Says 5%-6% Is Needed

TL;DR: CBO Director Phillip Swagel says growth alone can't steady U.S. debt: it would take 5%-6% real GDP growth, assuming interest rates of 4%-5%, Fortune reported on October 10. The economy grew 2.2% last quarter. Gross debt is $40 trillion, and publicly held debt is 100% of GDP.

On a submarine, nothing counted until it was verified. That habit stuck. Downside first. So here is the arithmetic behind that 5%-6%, why interest rates matter more than growth once debt gets this large, and what I'd check in a portfolio before a refinancing date arrives.

What did the CBO director actually say?

Swagel's claim is that growth alone can't stabilize the debt. Assuming interest rates of 4%-5%, he estimated that nominal GDP growth would have to reach 7%-8% and real growth would have to hit 5%-6%, according to Fortune.

That is more than double the latest real GDP pace of 2.2% in the second quarter. Even bullish Wall Street forecasts put full-year growth at 2.5%. Without that boom, the CBO sees the debt-to-GDP ratio rising to 120% by 2036.

Who disagrees, and how big is the gap?

Treasury Secretary Scott Bessent has argued the opposite. "With 3% growth, we grow our way out of this," he said at Southern Methodist University last month, per Fortune.

Source	Growth it says is needed	What it buys
Treasury Secretary Bessent	3%	"Grow our way out"
Committee for a Responsible Federal Budget	3.3% per year, sustained	Debt held at 100% of GDP
Penn Wharton Budget Model, via Fortune	3.5%-4% over a decade	Debt-to-GDP ratio maintained
CBO Director Swagel	5%-6% real	Debt stabilized at 4%-5% interest rates
Latest actual (Q2)	2.2%	n/a

The spread comes mostly from what each side assumes about interest rates and what "stable" means.

Even the friendliest number on the table, 3%, sits above recent history. The CRFB notes the economy has grown 3% or more in four years out of the last 20 and has not once had two consecutive years at that pace.

Why does the interest rate matter more than the growth rate?

Because the two feed each other. Swagel put it this way, as Core Memo reported: "An interest rate shock feeds into the deficit, feeds into the debt, feeds back into interest rates."

Core Memo reports the bond market is absorbing all the debt Treasury is issuing, yet Fortune says long-term yields have surged to the highest levels in 24 years. Swagel said the effect of debt on rates is small today, with a 1-percentage-point increase in the debt ratio leading to a 0.015-percentage-point hike in long-term rates.

Small is the operative word. I wouldn't build a plan on it staying small, and I covered the yield side in my earlier piece on the $40 trillion mark.

A caution on my own read. The CBO and the CRFB are projecting, and projections miss in both directions. The CRFB says sustained growth above 3% isn't impossible given the potential of artificial intelligence, though it would likely be unprecedented. Nobody here is forecasting a crisis date.

What does this mean for an accredited investor?

I'm not telling you to buy or sell anything. What I'd do is find out how much of your portfolio quietly depends on cheap money.

If you hold private real estate or credit, ask the questions I'd ask any sponsor. How much debt sits under the asset, is it floating or fixed, and when does it refinance? Our guide to real estate debt funds covers the liquidity trap on that side.

If you're newly accredited and still deciding whether to take on rate-sensitive private exposure, ask them before the first check, not after. If a fund borrows to pay for growth, the LP agreement red flags show what happens when rates stay high. And if you hold alternatives inside a retirement account, the self-directed IRA rules limit how you can respond.

Common mistakes

The first mistake is treating a 3% target as a plan. The CBO director just put numbers on the gap between 3% and what he says is required.

The second is reading a small rate effect today as a permanent one. Swagel's 0.015-point figure describes now, not a debt ratio at 120%.

The third is ignoring refinancing dates. A deal that looks fine at today's rates can look very different when its loan comes due.

FAQ

Can the U.S. grow its way out of its debt? The CBO's director says it's "probably not plausible." Holding the ratio steady would take 5%-6% real growth at 4%-5% interest rates, per Fortune. The latest quarter came in at 2.2%.

How much debt does the U.S. have? Gross debt is $40 trillion, and publicly held debt equals 100% of GDP, according to Fortune's report on Swagel's remarks. The CBO projects the ratio at 120% by 2036.

What growth rate does Bessent say is enough? Bessent said at Southern Methodist University last month that 3% growth would let the country grow out of the problem. The CRFB estimates 3.3% sustained growth would hold debt at 100% of GDP.

Do higher yields make this worse? Fortune reports long-term yields are at 24-year highs. Swagel says debt's current effect on rates is small, 0.015 points per 1-point rise in the debt ratio. His warning is the feedback loop, where higher rates raise the deficit, which raises the debt.

What to do today

Sign up for the free AIN briefing. When the next CBO number lands, I'll tell you what it changes for private deals, and where the downside is.

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