The Deficit Is a Big Cost-of-Living Problem

President Donald Trump’s utter failure to address the cost-of-living concerns that put him back in the White House has once again made them the top issue for voters heading into this year’s midterm elections. And the budget-busting policies he’s pitched as his solution to the problem are actually making it worse.

In the short term, high budget deficits fuel inflation and push the Federal Reserve to raise interest rates in response, as it did last week for the first time since 2023. That leads to higher borrowing costs for mortgages, credit cards, and other types of credit that Americans rely on to meet their needs. In the long term, high debt accumulation crowds out investment spending and slows economic growth, thereby reducing household incomes.

National policymakers who actually want to tackle the cost-of-living challenge will need to tackle our government’s growing fiscal imbalance. Unfortunately, both parties’ “affordability agendas” are pushing in the opposite direction.

The president’s first move was to put more money in people’s pockets via a giant tax cut in the One Big Beautiful Bill Act, which is responsible for roughly a quarter of this year’s roughly $2 trillion budget deficit. Now, he’s promised (somewhat unconvincingly) to send every adult a $5,000 check if Republicans keep Congress in November. That would add another trillion dollars on top.

Although far less reckless, Democrats are campaigning on some expensive plans of their own, including sweeping middle-class tax cuts and subsidies for health care, child care, housing, energy, and virtually every other source of strain on Americans’ pocketbooks. House Minority Leader Hakeem Jeffries will likely draw from that pool of ideas to craft Democrats’ first major bill should they take the majority. Many in the party have proposed raising taxes on the rich to pay for some of these proposals, but those are unlikely to cover the full cost.

Borrowing to pay for current policies, let alone these new initiatives, will become increasingly costly at a moment when the financial system is finally starting to show signs of stress from unchecked deficits. Shortly after the gross national debt passed the symbolic milestone of $40 trillion last month, interest rates for long-term government borrowing reached their highest level in nearly two decades — and Treasury Secretary Scott Bessent’s moves to reverse the surge largely failed.

Unless Washington changes course, the costs will only grow and further pinch the American people’s pocketbooks in several ways:

Budget Deficits Increase Inflationary Pressure on Prices

A budget deficit — the gap between what a government spends and what it raises in revenue over a single year — is not always a bad thing. During recessions, temporary deficit spending can help plug the hole created by depressed private-sector demand. But today’s economy is growing at a typical rate of 2% per year, while the unemployment rate sits at just 4.1%. Despite these relatively healthy economic conditions, the 2026 budget deficit is expected to reach roughly 6% of gross domestic product (GDP) — the highest level recorded outside of a recession or major war before the COVID-19 pandemic, and roughly double what it was when Trump first took office 10 years ago.

When an economy is operating at full employment, like America’s is today, deficit spending can’t meaningfully increase economic output. Instead, deficits inject more money chasing a finite amount of goods and workers to produce them, causing prices to rise. Americans experienced this exact dynamic during the Biden administration. Several analyses showed that excess stimulus contributed up to 3 percentage points of higher inflation, as the new spending sharply increased demand while supply remained limited.

Now, Trump is repeating Biden’s mistakes. Estimates by the Yale Budget Lab found that a permanent increase in the deficit comparable to that of his tax cut would reduce the average household’s purchasing power by at least $300 and up to as much as $1,250 after just five years, negating more than half of the tax cut’s supposed benefit.

Unchecked Government Borrowing Raises Borrowing Costs For Everyone

The Federal Reserve fights inflation by raising short-term interest rates, but that just shifts the pressure families feel from higher prices to higher borrowing costs. Americans have felt that pinch these last several years as the Fed has kept rates well above pre-pandemic levels while struggling to bring down inflation back to its 2% target.

Interest rates on student loans, mortgages, and auto loans are now hovering close to 20-year highs, while interest rates on credit cards have reached the highest level since the Fed started keeping records in 1994. Compared with pre-pandemic rates, a struggling parent with $10,000 in credit card debt now accrues $600 in additional interest every year. A new graduate with $50,000 in student debt accrues another $930. And a new homebuyer taking out a $500,000 mortgage now pays $12,000 more each year. These higher interest rates are especially burdensome for lower-income families, who more frequently need to borrow to meet their day-to-day needs.

More deficit spending will only add to the pain. Neutralizing the inflationary effects of a deficit increase the size of Trump’s $5,000 checks proposal, for example, could require the Federal Reserve to increase short-term interest rates by almost a full percentage point.

Higher government debt loads put additional pressure on interest rates, as greater demand for borrowing forces the Treasury to offer progressively higher rates to attract new lenders. Past studies have found that interest rates rise by roughly 3 basis points for every percentage-point increase in the ratio of federal debt to GDP. That would mean debt added since Trump first took office is responsible for a permanent 0.75 percentage-point interest in borrowing costs already, which could swell to 3 percentage points if debt continues to accumulate as the Congressional Budget Office currently projects it to over the next 30 years.

In reality, the costs might be even higher than those projections suggest. Other countries have seen borrowing costs rise twice as much per point of debt-to-GDP. And new evidence suggests that the premium U.S. debt has historically enjoyed relative to other securities may already be fading, meaning investors may demand higher yields more comparable to those of other borrowers moving forward.

Rising Debt Leads to Slower Growth and Lower Wages

There are two sides of the affordability equation: How much families spend and how much they earn. As the government borrows more, it competes with private companies who in turn also have to pay higher interest rates to find lenders. That hurts business investment, ultimately dampening economic growth and household incomes.

One visible example of how rising government debt and borrowing costs can “crowd out” private investment is the homebuilding industry. Most homebuilders finance new construction with debt, and rising interest rates have forced some developers to cancel projects. The rate of new housing starts has dropped by 20% since interest rates began rising in 2022, leading to falling employment in the residential construction industry while also exacerbating America’s housing shortage.

Private investment is not the only kind crowded out by debt. The government invests in public goods like education, infrastructure, and scientific research that make private investment possible and create the foundation for growth. Analyses by the Organisation for Economic Co-operation and Development (OECD) found that every dollar of public investment spending generated two dollars of private investment spending, and permanently increasing public investment spending by 1 percent increases potential GDP by an average of 5 percent over the long-term.

But this category of spending is hovering near its lowest level as a percent of GDP since the 1950s. Meanwhile, federal spending on annual interest costs is higher than it has ever been in U.S. history — and more than double what the federal government spends on non-defense investments. This imbalance will likely only grow worse as rising interest rates, along with the growing size of the debt on which interest is paid, push annual interest payments to new heights and increase competition for resources currently going to public investment.

If the national debt continues on its current trajectory, the Congressional Budget Office projects it will reduce national income by 4% — equivalent to $4,600 per person — by 2055, relative to a scenario where the debt is stabilized at current levels. But this projection could actually understate the cost: numerous studies suggest the consequences of additional debt are higher the more indebted a country already is, and the United States has never before experienced the debt levels it is projected to reach beyond 2030.

Washington Must Confront the Problem Soon

The senators elected in November’s midterm elections, and the next president, will have to confront the problem over their term in a way none of their predecessors have for a generation. At the end of 2028, several of Trump’s tax cuts will expire. In just over six years, major trust funds that have been used to finance Social Security’s and Medicare’s growing shortfalls will run out of money. If Congress fails to act, it would trigger across-the-board benefit cuts.

Addressing the problem in a fiscally responsible way could stabilize our national debt and begin reversing its contributions to today’s cost-of-living challenges. On the other hand, adding to these shortfalls and financing them with open-ended borrowing would embed those costs in our economy for the long run. And in the worst-case scenario, it could signal to investors that Washington is too dysfunctional to ever address its fiscal challenges and potentially provoke a true fiscal crisis.

At this pivotal moment, candidates for national office must start treating the national debt as the real cost-of-living issue it really is. That means seriously considering the policies it will take to get our fiscal house in order and putting aside many of the budget-busting ambitions they have been flocking to in recent months.