Dr Luke Hartigan

The tax cuts bill that passed the US Senate in July will add another US$3 trillion (A$4.6 trillion) to US debt. President Donald Trump calls it the "big, beautiful bill"; his erstwhile policy adviser Elon Musk called it a "disgusting abomination".

Foreign investors have already been rattled by Trump's upending of the global trade system. The eruption of war in the Middle East would usually lead to "flight to safety" buying of the US dollar, but the dollar has barely budged. That suggests US assets are not seen as the safe haven they used to be.

Greg Combet, chair of Australia's own sovereign wealth fund, the Future Fund, outlined many of the new risks arising from US policies in a speech on Tuesday.

As investors turn cautious on the US, at some point the surging US debt pile will become unsustainable. That could risk a financial crisis. But at what point does that happen?

When talking about the sustainability of US government debt, we have to distinguish between total debt and public debt.

Public debt is owed to individuals, companies, foreign governments and investors. This accounts for about 80 percent of total US debt. The remainder is intra-governmental debt held by government agencies and the Federal Reserve.

Public debt is a more correct measure of US government debt. And it is much less than the headline total government debt amount that is frequently quoted, which is running at US$36 trillion or 121 percent of GDP.

Governments are not like households. They can feasibly roll over debt indefinitely and don't technically need to repay it, unlike a personal credit card. And countries such as the US that issue debt in their own currency can’t technically default unless they choose to.

Debt also serves a useful role. It is the main way a government funds infrastructure projects. It is an important channel for monetary policy, because the US Federal Reserve sets the benchmark interest rate that affects borrowing costs across the economy. And because the US government issues bonds, known as Treasuries, to finance the debt, this is an important asset for investors.

There is probably some limit to the amount of debt the US government can issue. But we don't really know what this amount is, and we won't know until we get there. Additionally, the US's reserve currency status, due to the US dollar's dominant role in international finance, gives the US government more leeway than other governments.

What is important is the government's ability to service its debt – that is, to pay the interest cost. This depends on two components: growth in economic activity, and the interest rate on government debt.

If economic growth on average is higher than the interest rate, then the government's effective interest cost is negative and it could sustainably carry its existing debt burden.

The interest cost of US government debt has surged recently following a series of Federal Reserve interest rate hikes in 2022 and 2023 to quell inflation.

The US government is now spending more on interest payments than on defence – about US$882 billion annually. This will soon start crowding out spending in other areas, unless taxes are raised or further spending cuts made.