Here is a farm budget no lender would sign off on: The milk check grows a little each year, the loan balance grows faster, and the interest payment now costs more than anything else except the feed bill. You could not run a dairy that way for long, yet Washington has been running the country that way for years. Federal debt grew by $2.4 trillion in the past 12 months, well ahead of the economy that must service it, and it has kept outrunning growth no matter which party holds Congress. Some economists think artificial intelligence (AI) could finally let the economy close the gap. Rising interest costs Washington closed fiscal year 2026 on Sept. 30 with a $2 trillion deficit, or 6.2% of GDP, in a year without a recession. It spent $7.4 trillion and collected only $5.4 trillion in tax revenue. Gross federal debt passed $40.5 trillion on Oct. 26, up $2.5 trillion in twelve months. Net interest on the federal debt rose 11% last year and crossed $1 trillion for the first time. It now rivals Medicare as the government’s second-largest expense, trailing only Social Security, and costs more than the entire defense budget. The Congressional Budget Office (CBO) expects debt held by the public, about 100% of GDP today, to reach 120% by 2036, with annual deficits climbing to $3.1 trillion. Much of the federal budget does not need an annual re-authorization by Congress to keep growing. Social Security, Medicare, and interest costs keep rising under existing commitments. Cutting benefits is unpopular with the voters who receive them and raising taxes is unpopular with those who would pay more. Economic growth and debt Faster economic growth could reduce the debt burden. The usual measure compares debt with gross domestic product (GDP), the total value of goods and services produced in a year. If the economy grows faster than the debt, that ratio falls even as the dollar amount owed rises. That is largely how America reduced its World War II debt burden. In the decade after the war, productivity grew close to 3% a year and the baby boom pushed population growth to about 1.7% a year, so the economy grew roughly 4% annually. Debt fell from over 100% of GDP in 1946 to under half that by 1960, without ever being paid off. Population growth offers much less help today. The U.S. has slowed to roughly 0.5% a year, a third of the boomer postwar pace. With birth rates falling and immigration tightening, economic growth will depend increasingly on productivity gains. AI could raise output per worker across the economy through automating both white collar tasks and physical work through robots. Higher output would mean more taxable income without higher tax rates. However, CBO’s forecast assumes AI adds only 0.1 percentage point a year to growth. In its fast-growth scenario, debt would reach 109% of GDP in 2036 instead of 120%. In contrast, a July 2026 Brookings paper went further. It estimated that an unusually large productivity gain could cut annual deficits from about 6% of GDP to about 2% by 2036. That’s an optimistic forecast, but plausible. The same research paper also indicated that other effects of AI could offset more than half of the budget improvement. Longer lifespans from better medicine means more years of Social Security and Medicare benefits, and workers displaced by AI may need more help from income-support programs. A shift from wage income to capital income would move more earnings into categories taxed at lower rates. Faster growth tends to push interest rates up, raising the cost of refinancing federal debt, and competition over military use of AI could escalate defense spending. The timing matters, too. Interest accumulates every year, while new technology can take years to improve measured productivity. Electricity took decades to reshape American factories because much of the benefit came from redesigning plants around it. If AI gains arrive slowly, federal interest costs will keep accumulating in the meantime. The boom in data-center investment gives reason for optimism, but that alone does not guarantee how much productivity will improve. The budget surpluses of the 1990s reflected spending caps and tax hikes as well as strong growth. AI can give Washington more time to address the deficit, but Congress will still have to make hard decisions about taxes and spending. What it means on the farm Federal borrowing affects what your lender charges. Treasury yields help determine loan rates, and a government borrowing $2 trillion a year competes with farms and other businesses for savings. The 10-year Treasury yield closed at 5% on Oct. 28, and the Fed raised short-term rates in September. For every $1 million of short-term debt at a variable rate, a one-percentage-point jump adds $10,000 to annual interest expense. Rising interest expense also leaves less room for farm programs. Dairy Margin Coverage (DMC), premium subsidies on crop and livestock insurance, and conservation funding could all face cuts in a deficit agreement. On the farm, AI’s most immediate benefit is likely to be in reducing labor needs. Robotic milkers, rumination and activity collars that flag a sick fresh cow or a heifer in heat, and software that tightens rations are already used on many operations. Finding enough hired labor remains a major constraint, giving developers a strong reason to focus on it. The effect on dairy markets is less straightforward. If AI lifts U.S. growth and interest rates, the dollar will likely strengthen, making U.S. cheese, butter, and milk powder more expensive overseas. That matters when exports account for around 17% of U.S. milk solids. Higher incomes at home could, however, boost domestic demand for dairy products. Planning for either outcome Farm planning cannot wait for a clear answer about AI’s effect on the federal budget. The better approach is to start with the costs and risks you can assess today. Check whether your cash flow could cover interest rates two percentage points higher than today’s, and consider fixed rates where the cost makes sense. Use the risk management programs Congress funds today, including Dairy Revenue Protection and DMC. Yet, make sure your long-term business plan does not rely on today’s subsidy rates lasting indefinitely.
The authors are with Bozic LLC, a company that owns intellectual property rights to DRP, LRP, and LGM and manages these programs in a partnership with USDA. | 
