The White House’s proposed $1.5 trillion defense budget for fiscal 2027 is set to push the U.S. debt-to-GDP ratio past its post-World War II high, according to independent projections.
The Trump administration’s request for a record $1.5 trillion in defense spending for fiscal 2027, a 42% increase, is projected to send the U.S. public debt soaring to 124% of gross domestic product by 2036, according to the Committee for a Responsible Federal Budget. The budget, which includes a $200 billion supplemental for the ongoing war in Iran, relies on optimistic economic growth assumptions that are nearly double the forecasts of non-partisan offices.
"The biggest loser in the Iran conflict likely will be the U.S. deficit," Libby Cantrill, head of public policy at Pimco, wrote in a recent client note. She highlighted the administration's supplemental request to replenish munitions on top of the stunning increase proposed for the next fiscal year.
The White House Office of Management and Budget (OMB) projects the budget gap will shrink, based on an assumed 3% annual real GDP growth. However, the Congressional Budget Office (CBO) uses a more conservative 1.8% growth estimate. Under the CBO’s assumptions, the CRFB calculates the national debt will top its post-World War II peak of 106% of GDP by fiscal 2028, before climbing to 124% over the next decade.
This fiscal path puts the U.S. on course for a potential debt crisis, with interest payments on the national debt already exceeding defense spending. To offset the $3.2 trillion in new defense funding over 10 years, the administration proposes $2.5 trillion in cuts to nondefense discretionary spending, including a 12% cut to the Department of Health and Human Services, setting up a contentious battle in Congress.
The core of the disagreement lies in fundamentally different views of the economy's potential. The OMB's budget outline sees the 10-year Treasury note yield falling to 3.3% by 2029, while the CBO expects it to rise to 4.4% by 2031. This divergence has massive implications for the cost of servicing the nation's $39 trillion of accumulated debt. The administration's budget would add $3.2 trillion to defense funding over the next decade, while its proposed cuts to nondefense spending total only $2.5 trillion, leaving a significant gap that will likely be financed with more debt.
The proposed $1.5 trillion defense budget represents a sharp increase from the $1.1 trillion baseline and comes as the costs of the conflict with Iran continue to mount. Military officials told Congress the first week of the war cost around $11.3 billion. While the White House is expected to request between $80 billion and $100 billion in supplemental funding for the current year, down from an initial $200 billion Pentagon estimate, the fiscal 2027 proposal prioritizes a massive military buildup. This includes over $5 billion for the continued development of the F-47, the Air Force's next-generation fighter jet slated for its first flight in 2028.
Lawmakers have expressed reservations. Democratic Senator Mark Warner said he would "take a look at anything" but criticized the administration for not being clear about its goals in the war from the outset. Some Republicans have also indicated their support could wane if the conflict extends beyond the 60-day limit imposed by the War Powers Resolution. The proposed cuts to domestic programs, such as a $15 billion reduction for the Department of Health and Human Services, are certain to face stiff opposition from Democrats.
This article is for informational purposes only and does not constitute investment advice.
