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Can AI bend the US debt curve?

Productivity gains from AI could materially reshape the US debt trajectory

Productivity gains from AI could materially reshape the US debt trajectory

Data as of February 2026. 2025 figure is based on actual data (A) while the 2026 to 2036 numbers are forecasts. Source: US Congressional Budget Office, How Changes in Economic Conditions Might Affect the Federal Budget: 2026 to 2036. Scenarios assume annual productivity growth is 0.5 percentage points above or below the CBO baseline of 1.1%.

Markets have been driven by three closely connected macro forces this year: artificial intelligence (AI), inflation and interest rates. Beyond shaping equity valuations and bond yields, these forces could materially influence whether the US can stabilise its rising public debt burden.

 

Under the Congressional Budget Office’s baseline, debt held by the public is projected to rise from about 99% of GDP in 2025 to 120% by 2036. However, if annual productivity growth were 0.5 percentage points above baseline, the ratio would reach roughly 110%; if it were 0.5 percentage points below, it would approach 132%. This 22 percentage point gap highlights how strongly the fiscal outlook depends on the economy’s capacity to grow.

 

Why does productivity matter? A more productive economy generates more output from the same labour and capital. Faster growth supports tax revenues, while a larger economy expands the denominator against which debt is measured. Together, these effects improve the debt-to-GDP trajectory. Weaker productivity works in reverse.

 

AI therefore presents two potential paths for the US fiscal outlook. If the buildout raises demand and inflation before productivity improves, interest rates could remain higher and add to the government’s debt-servicing costs. If AI eventually generates sustained economy-wide productivity gains, stronger growth and tax revenues could improve the debt-to-GDP trajectory.

 

Just as AI could influence US debt via its impact on productivity, the debt trajectory could in turn shape outcomes across equity and fixed income markets. A more sustainable fiscal path could ease pressure on government borrowing and rates, creating a more supportive backdrop for equity valuations and bond returns. Conversely, a worsening debt trajectory could require greater Treasury issuance, increase interest rate volatility and raise financing costs for companies and the government alike.

 

The key takeaway for investors is that the transition from AI investment to economy-wide productivity is unlikely to be immediate or linear. Investors should therefore consider being positioned for a wide range of economic and market outcomes through a selective and diversified approach: maintaining exposure to companies capable of compounding earnings across changing conditions, alongside bond allocations that provide income, diversification and potential portfolio resilience amid continued macroeconomic and market uncertainty.

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