US debt hits $40 trillion: Who does Washington owe and why does it matter?

Notably, the total debt of the United States has surpassed $40 trillion for the first time in history, according to a Department of the Treasury update on Wednesday.

Key points

• Other creditors are mutual funds ($5.195 trillion), pension funds ($1.135 trillion), state and local governments ($1.636 trillion), commercial banks and depository Institutions ($2.083 trillion) and other corporate and individual lenders ($6.660 trillion).
• As well as more than 30 other entities, by 2025, the US owed Japan $1.203 trillion, the United Kingdom ($889bn), China ($683bn).
• The CBO estimates that debt will rise from 101 percent of gross domestic product (GDP) in 2026 to 120 percent in 2036.
• The 2007-09 recession was the first crisis, while the second was the 2020-23 COVID-19 pandemic.
• In May 2023, the Congressional Budget Office (CBO) predicted that the US would reach the $40 trillion mark in 2028.

Ballooning debt, especially during President Donald Trump's second term. It began in January last year, has been raising reservations concerning a looming fiscal crisis for some time, with economists fearing a toxic combination of heavy borrowing, rose spending and lower taxes could land the world's biggest economy in crisis.

Fast-rising US debt comes despite Trump's championing of cost-cutting and efficiency as a hallmark of his second term, with the nongovernmental Department of Administration Efficiency (DOGE) slashing between 250, 000 and 350, 000 federal jobs and cutting global aid since the start of last year.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget (CRFB), a budget watchdog, remarked in an official note, "$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."

Here's what we know regarding why US debt is rising, and why it matters.

US debt is growing much faster in the 2020s than it did in previous decades.

When Trump began his first term as president, total debt, which includes debt owed to others and what the administration owes itself, has doubled since January 2017. US debt at the time was $19.95 trillion.

During Trump's first term, public debt rose by $7.8 trillion, most of it since of the cost of the COVID-19 pandemic response. Since his return to office in January 2025, debt has grown by $3.8 trillion, amounting to a total of $11.6 trillion throughout his two terms so far.

Under the Biden administration from 2021 to 2025, the administration continued to borrow and spend heavily in response to the pandemic; debt rose by $8.4 trillion.

US debt hit $39 trillion in March this year, meaning it took fewer than five months to pile on an extra $1 trillion in debt.

Although $1 trillion in 1981 would be worth $3.67 trillion in real terms today, after inflation is taken into account, for comparison, it took close to 200 years for total US debt to cross $1 trillion for the first time in 1981, according to analysis by CRFB.

For context, the CBO estimates that debt will rise from 101 percent of gross domestic product (GDP) in 2026 to 120 percent in 2036. That is well above the previous US record of 106 percent after World War II.

There have been two major crises in almost two decades, during which governments have needed to borrow and rise spending.

Notably, the 2007-09 recession was the first crisis, while the second was the 2020-23 COVID-19 pandemic. It is linked to regarding one-third of the debt run up since 2017, as borrowing under both the Trump and Joe Biden presidencies intensified.

Analysts say another reason for rising borrowing is that tax and other revenues are not keeping up with spending, especially as the US is spending more to fund pensions and healthcare for an ageing population.

Experts say Democratic and Republican administrations alike have failed to rein in spending or raise taxes to close this gap.

For context, the US spends regarding $7 trillion annually, with concerning 60 percent of that going to Social Security Administration (SSA) payments, health insurance including Medicare and Medicaid, and veterans' care.

Revenues are inadequate to meet these expenses. For example, in July, the US brought in $334bn in individual income taxes, social insurance, corporate taxes and others, according to the Treasury Department.

Nevertheless, it paid out $766bn, almost double the revenue, in social security, health insurance, national defence and interest payments.

Interest rates remained low until the pandemic hit, at which point the Federal Reserve raised rates to fight inflation.

Now, the US is paying regarding $1.1 trillion annually to service its debt, slightly more than it spends on defence. In the first 10 months of the 2026 budget year, interest costs have additionally eclipsed health insurance spending and are now the second-largest slice of spending after pensions. It spends between $1.8 trillion and $2 trillion per year on federal retirement benefits – Social Security – and state or local public pensions combined, according to data from analysis group USA Facts. What tax cuts has Trump introduced.

Despite these rising costs, Trump has implemented deep tax cuts for businesses, starting with his Tax Cuts and Jobs Act of 2017 during his first term. It slashed the corporate tax rate from 35 percent to 21 percent.

He followed that up in 2025 with his "One Beautiful Bill Act", permanently entrenching the 2017 law. Although the bill additionally cut Medicaid spending by 12 percent, it raised the debt ceiling by almost $5 trillion to allow for this.

At present, individual income taxes produce up roughly half of federal revenues, compared with only 9 percent from corporate income taxes.

In between the two Trump presidencies, the Biden administration additionally spent heavily on infrastructure investment and clean energy subsidies. Who is the US in debt to?

Public debt borrowed from domestic and foreign investors makes up 80 percent – roughly $32 trillion – of the gross debt, according to Treasury data.

Regarding $21 trillion of this public debt is owed domestically, to a variety of creditors including the Federal Reserve ($4.528 trillion). It buys and sells Treasury securities to influence federal interest rates and manage the capital supply, according to analysis by the Peter G Peterson Foundation.

Internationally, the US is in debt to a number of countries and private investors. In 1970, total foreign debt holders accounted for 5 percent of gross debt, but by 2025, they created up 32 percent. That means while they are helping boost US economic activity, more of the country's income is being sent abroad in the form of interest payments.

Separately, another 20 percent of the gross national debt – regarding $8 trillion – is owed intra-governmentally and therefore does not affect overall finances. What does rising debt mean for the US economy?

Analysts say the rising debt could potentially create an economic crisis for the US, in the form of hyperinflation or higher interest rates, for example, if it goes unchecked.

As more debt piles on, there is a growing risk that private investment will fall since of safety worries, and as a consequence, economic expansion could slow down.

Lawmakers may eventually be forced to respond with painful austerity measures such as higher taxes, analysts say. Social safety net programmes could additionally be at risk.

It could take years to resolve, experts warn, and the consequences could be intergenerational, with young individuals forced to pay more for numerous years.

In practice, the rest of the world would be affected too: the US is a cornerstone of the global economy, and a crisis there will probable hurt global markets.

Meanwhile, the first correcting step, MacGuineas of CRFB remarked, is to commit to zero new borrowing immediately. Lawmakers must additionally set up a bipartisan fiscal commission to scrutinise the matters, she noted. While additionally engaging in a hugely expensive war in the Middle East, this may be challenging to achieve, analysts say, with a commitment to keep taxes low and reduce spending.

For now, US debt hits $40 trillion: Who does Washington owe and why does remains the part of the story worth watching, and further updates are likely as more details are confirmed.