US Debt Hit US$40 Trillion: A Lesson for Malaysia

 

The United States has crossed a fiscal milestone that would have seemed almost unimaginable a decade ago. On 18 August 2026, total US national debt reached US$40.047 trillion, according to the US Treasury. The debt has more than doubled from approximately US$19.95 trillion in January 2017. 

The significance of US$40 trillion is not the number itself. The bigger question is whether the American economy and government revenues can grow sufficiently to service the debt without requiring progressively larger borrowing. That is the real fiscal test—and it is a question Malaysia should take seriously.

The US experience is therefore not a warning that Malaysia is about to face an American-style debt crisis. It is a warning about how a manageable fiscal problem can become politically and economically difficult to correct if structural deficits are allowed to persist for too long.

The American debt feedback loop

US public debt is now roughly equivalent to the country's entire annual economic output. The Congressional Budget Office (CBO) projects debt held by the public at 101% of GDP in 2026, rising to 120% by 2036 and potentially 175% by 2056 under its long-term projections. The federal deficit is projected at US$1.9 trillion, or 5.8% of GDP, in 2026 and US$3.1 trillion, or 6.7% of GDP, by 2036.

The worrying element is the composition of the deficit. Net interest costs are projected at about US$1.0 trillion in 2026, equivalent to 3.3% of GDP, and are projected to rise to US$2.1 trillion, or 4.6% of GDP, by 2036. Interest payments have become one of the largest items in the federal budget and now exceed defence spending.

This creates a debt feedback loop:

large deficit → larger borrowing → larger debt → higher interest bill → larger deficit → still more borrowing.

The problem becomes particularly serious when interest rates are high because every refinancing of maturing Treasury debt occurs at higher rates. The Treasury bond market therefore becomes central to the problem. The larger the amount of debt that has to be refinanced, and the higher the yield investors demand, the faster interest expenditure rises.

This is why simply saying that America can "grow its way out of debt" is insufficient. Economic growth helps by enlarging the denominator of the debt-to-GDP ratio and generating tax revenue. But if government expenditure and interest costs continue growing faster than revenue, even a large economy can remain on an unsustainable fiscal trajectory.

CBO projects that US revenues will remain around 17.5–17.8% of GDP over the coming decade, while expenditure rises from 23.3% to 24.4% of GDP, driven particularly by Social Security, Medicare and interest costs.

The underlying American problem

The American fiscal problem is therefore structural rather than simply cyclical. It reflects the combination of:

• rising Social Security and Medicare expenditure;
• persistently high deficits;
• rapidly increasing interest payments;
• tax policies that have constrained revenue;
• high refinancing requirements; and 
• insufficient political willingness to make difficult adjustments.

The arithmetic ultimately leaves only a limited number of choices: reduce expenditure, increase revenue, reform entitlement programmes, or combine all three.

There are also more unconventional possibilities—financial repression, allowing inflation to erode the real value of debt, manipulating the maturity structure of government borrowing or relying on stronger nominal GDP growth. But these are not substitutes for fiscal reform. Used excessively, they can undermine confidence in government bonds and ultimately increase borrowing costs.

That is the danger.

The US does not have to become technically insolvent for its fiscal position to become damaging. A loss of confidence in Treasury securities could push yields higher, making the interest bill even larger and creating a self-reinforcing debt spiral.

The political problem is equally important. The longer reform is postponed, the more difficult it becomes because every adjustment creates a constituency of losers.

This is where the American experience contains a lesson beyond economics. A fiscal problem can become politically impossible before it becomes mathematically impossible.

For a country that has global military commitments, this eventually becomes a strategic issue. Rising debt does not mean the immediate "end of the American empire", but persistent fiscal deterioration can progressively constrain the resources available for defence, diplomacy, infrastructure and crisis response. A superpower's military strength ultimately rests on the productive and fiscal capacity of its economy.

What does this mean for Malaysia?

Malaysia's situation is materially different, and this distinction is important. It is not facing a US-style debt crisis today.

Federal Government debt stood at RM1.321 trillion, or 65.3% of GDP, at the end of 2025. Importantly, 98.4% of that debt was domestic. By the second quarter of 2026, central government debt had risen to about RM1.379 trillion.

Malaysia therefore has several advantages over the United States:

• debt is predominantly ringgit-denominated;
• the domestic institutional investor base is substantial;
• foreign-currency exposure is relatively limited;
• the banking and financial system remains resilient;
• Malaysia continues to record economic growth; and 
• the government has an explicit fiscal-consolidation framework.

Indeed, the government's 2026 fiscal target is to reduce the fiscal deficit to 3.5% of GDP, from 3.8% in 2025. The recently issued Pre-Budget Statement 2027 also explicitly acknowledges the need to balance household protection with fiscal consolidation and higher-value economic growth.

But this does not mean Malaysia can be complacent. It is approaching a strategic fiscal crossroads. And the real danger is not sudden insolvency. It is fiscal crowding-out:

Government debt rises → interest payments rise → less money is available for development → government borrows again → private investment is crowded out → growth slows → revenue weakens → debt rises further.

That is the cycle Malaysia must prevent.

The dilemma facing the MADANI government

This is particularly difficult politically because the government is attempting fiscal consolidation at a time when households and the retail sector are experiencing pressure.

There is simultaneously strong political pressure on the PKR-led government to demonstrate economic growth, improve living standards, support businesses and protect consumers.

The temptation is therefore obvious: if consumption weakens, increase government spending. But Malaysia should learn from America that borrowing to maintain consumption is fundamentally different from borrowing to increase productive capacity.

The government should be much more willing to borrow for infrastructure, logistics, energy security, industrial capacity, technology, TVET and productivity-enhancing investment than for permanently financing recurrent expenditure.

This suggests a better fiscal principle:

Borrow for investment that increases future economic capacity; progressively reduce borrowing for recurrent consumption.

Fiscal consolidation should therefore not mean crude austerity. If government cuts spending too rapidly during an economic slowdown, GDP and tax revenue can fall, potentially worsening the debt-to-GDP ratio.

The answer is instead to change the composition of expenditure. Reduce low-value expenditure, leakage, duplication and blanket subsidies. Protect vulnerable households through targeted assistance. At the same time, preserve investment that raises productivity and attracts private capital.

The government's own fiscal stress tests demonstrate why this balance matters. A relatively modest primary-deficit shock could push Federal Government debt to 66.5% of GDP in 2026. More dramatically, a severe pandemic-like GDP contraction could push the ratio to 87.4% in 2027.

In other words, economic growth itself is a fiscal asset.

Act before fiscal reform becomes politically impossible

The most important lesson Malaysia should take from America is not "cut spending". It is do not wait until the problem becomes politically impossible to solve.

Malaysia still has room for incremental reform. That opportunity should be used.

The Fiscal Responsibility Act provides an important framework, but Malaysia could go further by adopting a stronger concept of debt quality. The question should not merely be whether government debt remains below a particular percentage of GDP. It should also ask:

What is the government borrowing for?

A RM50 billion borrowing programme that finances consumption is fundamentally different from RM50 billion invested in infrastructure, skills, energy and industrial capacity that generates future economic activity and tax revenue.

The ultimate objective should therefore be fiscal consolidation through growth-oriented restructuring, rather than austerity.

Malaysia should protect consumption without permanently subsidising it; reduce expenditure without destroying growth; increase revenue without suffocating investment; and borrow where borrowing creates future productive capacity.

The US demonstrates what happens when governments repeatedly postpone structural decisions because the political cost is too high. Malaysia still has the advantage of being able to make incremental changes before the fiscal problem becomes a political crisis.

The US$40 trillion milestone should therefore not be viewed simply as an American problem. It is a lesson in fiscal management for Malaysia:

Debt does not become dangerous merely because it is large. It becomes dangerous when the government loses the fiscal space to respond to the next crisis—and when interest payments begin consuming the resources needed to generate the growth that could have made the debt sustainable.

For Malaysia, the objective should be clear: do not allow today's political pressure for growth to recreate tomorrow's fiscal problem. The government must pursue growth, but growth that enlarges Malaysia's productive capacity and tax base—not growth purchased through ever-increasing government borrowing.