The yield on the US 10-year Treasury note climbed to 5.04% on Tuesday, marking its highest level since 2007. As yields continue their upward trajectory and concerns over American fiscal sustainability resurface, Treasury Secretary Scott Bessent is scheduled to testify before the House Financial Services Committee at 10:00 PM Beijing time tonight. Market participants will be closely watching whether he signals any new directions on fiscal policy, Treasury issuance and buyback programs, debt management, as well as the outlook for the dollar and interest rates. Meanwhile, the 'debt reduction through economic growth' strategy that Bessent has consistently championed is facing growing skepticism on the ground.

The 'Growth-Led Debt Reduction' Thesis: Ambitious in Theory, Questionable in Practice

Bessent remarked in August that 'global growth is the way to address this mountain of debt.' At an event in Texas last week, he reiterated his stance: with restrained federal spending and '3% growth, we can grow our way out of debt.' However, the empirical data fails to support this optimistic outlook. Even during 2023 and 2024, when inflation-adjusted US economic growth approached 3%, debt held by the public expanded by roughly 10% and 7%, respectively. Annual deficits exceeded $1.6 trillion in both years, and the debt-to-GDP ratio continued to rise.

Looking back at the late 1990s, the US GDP consistently grew at over 4%, which coincided with a dramatic fiscal turnaround—shifting from deficit to surplus. Yet that period was accompanied by tax increases and a slowdown in post-Cold War defense spending. Today's circumstances are markedly different. After multiple rounds of Republican-led tax cuts, rates have been significantly reduced, and in recent years, lawmakers from both parties have generally voted to increase rather than cut federal spending. An aging population is driving up expenditures for major entitlement programs like Social Security and Medicare. Additionally, amid heightened geopolitical tensions, President Donald Trump is seeking congressional approval for $1.5 trillion in defense spending, a 44% increase.

'You cannot solve this problem through growth alone,' said Douglas Holtz-Eakin, president of the right-leaning American Action Forum and a former director of the Congressional Budget Office. 'The numbers just don't add up.'

10-Year Yield Breaks 5%, Setting the Stage for a Tough Hearing

The rapid ascent of US Treasury yields in recent weeks has intensified worries about long-term debt sustainability. A key benchmark that Bessent himself has cited—the 10-year yield—has now eclipsed 5%, a level rarely seen since the early 2000s. On Tuesday morning, Bessent is likely to face tough questions about his strategy during the House Financial Services Committee hearing.

Bessent has predicted that the artificial intelligence boom will accelerate US economic growth, but mainstream projections do not anticipate 3% GDP growth arriving anytime soon. Surveys of economists by media outlets and the latest forecasts from the International Monetary Fund (IMF) both indicate that US growth will hover just above 2% in 2027 and 2028. Joe LaVorgna, a former adviser to Bessent, argues that growth is a vital component of reducing the deficit and overall debt burden, and that Bessent is right to emphasize it. However, he also believes that growth alone may not be sufficient. 'Looking at 3% growth potential, that's a pretty solid number and would go a long way toward improving the deficit picture,' he said. But 'you might need more than just growth.'

Aging Population Intensifies Entitlement Spending and Rising Interest Costs

A core issue is the steady increase in the number of American retirees, which in turn elevates spending on Social Security and Medicare—the two largest items in the US budget. From Trump's return to the White House through May of this year, the number of Social Security retirement beneficiaries grew by 2.8 million. Meanwhile, the number of US workers contributing to these programs rose by only 593,000. Trump has stated he will not touch these entitlement programs, and Congress has not pushed for significant reforms.

Holtz-Eakin points out that if everything goes smoothly and the economy grows rapidly, revenue would increase at the pace of nominal GDP, which includes inflation. He notes that 3% real growth plus 2% inflation translates to 5% nominal growth. However, Social Security spending grows at an average rate of 5.5%, while Medicare spending can rise by as much as 7.5%. 'So, you can't fix this problem,' he concludes.

The third-largest expenditure category for the US government is interest payments on outstanding debt, and this segment is expanding even faster. With one month remaining in the current fiscal year, net interest costs have already reached $1.02 trillion, an 8.9% increase from the same period last year. The rise in Treasury yields signals a risk of these costs accelerating further. Treasury Department data shows that as of the end of August, the average interest rate on outstanding debt was 3.48%, well below current yields. The five-year benchmark rate, which most closely matches the average maturity of outstanding debt, is approximately 4.77%. Meanwhile, the Treasury has recently leaned on shorter-duration bills with maturities under one year to fund issuance. If Federal Reserve Chairman Kevin Warsh and his colleagues raise the overnight policy rate on Wednesday, as widely expected, the cost of these short-term debts will also climb.

'There is no credible estimate suggesting that growth will be strong enough to magically make the fiscal situation disappear,' said Maya MacGuineas, president of the Committee for a Responsible Federal Budget (CRFB).

$5,000 Checks vs. Deficit Targets: The Fiscal Consolidation Puzzle

During Tuesday's hearing, Bessent may be questioned about a Trump proposal to send $5,000 checks to every American adult if Republicans retain control of Congress in the November midterm elections. The CRFB estimates that this proposal alone would cost $1.2 trillion over a year, against a current annual deficit of around $2 trillion. The group calculates that without offsetting measures, the deficit-to-GDP ratio could reach 9% or 10% next year.

Bessent has set a goal of reducing the deficit-to-GDP ratio to around 3% by the end of Trump's term in January 2029. In 2023 and 2024, the ratio exceeded 6%, and last year it was slightly below that level, partly due to a one-time accounting change related to federal student loans. Economists project the deficit-to-GDP ratio to be 6.4% in 2028, with forecasts ranging from a low of 4.5% to a high of 8%.

Bessent has indicated that he is working with White House budget director Russ Vought on a fiscal consolidation plan to lower the deficit. Although he has not detailed the specifics, he has hinted that anti-fraud measures could be a component. For many budget experts, a credible fiscal plan would require reforming entitlement programs. Stanley Druckenmiller, Bessent's mentor from his hedge fund career, recently penned a column calling for a proposal to gradually reform these programs.

Seth Carpenter, chief global economist at Morgan Stanley and a former Treasury official during the Obama administration, suggests that 'some form of growth-based fiscal consolidation' is plausible. 'But that depends on fiscal policy no longer turning expansionary, and that's the real challenge.' Holtz-Eakin estimates that to achieve the deficit levels Bessent desires through economic growth alone, the growth rate would need to reach 6%. Given an aging population and strict immigration limits, he says even 3% growth would be nothing short of a 'miracle.'