Swelling US debt could tip US markets into crisis as soon as next year, Wharton professor says

If the US doesn't adjust fiscal policy, markets could have a reaction similar to the UK's 2022 financial crisis, Wharton professor Joao Gomes said.

• Market chaos could come next year if the US doesn't adjust its fiscal path, Joao Gomes told CNBC.
• The Wharton professor pointed to the UK mini-budget crisis as a warning.
• The US can't afford to extend tax cuts next year, he said.

Congress needs to act fast to slow the alarming pace of US debt growth. If it doesn't adjust its fiscal trajectory soon, 2025 could be the year when markets start to roil, Wharton professor Joao Gomes warned.

It's a lesson he's borrowing from the UK's 2022 financial crisis, when a stimulus-heavy budget proposal sent domestic yields flying, mortgage rates soaring, and the pound plummeting to a historic low. 

"That's something that could definitely happen to us next year," Gomes told CNBC on Thursday. "We announce a fiscal path that markets just wake up to it and say 'it's unsustainable.'"

US investors already got some taste of what this could look like, after a Treasury bond collapse pushed yields to 5% levels in November 2023. Mounting US debt and an oversupply of Treasury bonds were among cited factors.

Today, Washington's debt load now stands at $34 trillion, an all-time high fueled by massive spending and rapidly rising debt-servicing costs. According to Bank of America estimates last month, the US is adding $1 trillion to its debt every 100 days.

In an era of higher interest rates, that's compounding a real risk that the US spirals into a default crisis within this century. Last year, a Penn Wharton Budget Model determined that the country has 20 years to address this issue, after which no amount of tax hikes or spending cuts will help. 

For that reason, Gomes expects 2017's tax cuts to be a significant point of contention next year, given that this program is set to expire next year, unless Congress elects to extend it. The reform was introduced under the Trump Administration, easing tax burdens on corporations.

"I think we'll have a serious debate next year about the tax cuts and whether to extend them or not," he said. "And I think we just can't afford them."

In large part, the fate of this program relies heavily on who takes over the White House in November; so far, neither candidate has outlined specific plans for to tackle the fiscal issue.

But others have warned that a solution wouldn't only reside in taxes. While those would likely have to rise across the income spectrum, both Democrats and Republicans must be willing to cut spending programs, Maya MacGuineas told Business Insider last year.

"There are many sensible plans out there," Responsible Federal Budget president then said. "We don't have the political will."

Gomes isn't alone in calling out the size of US borrowing; Wall Street giants such as Jamie Dimon and Ken Griffin have also made warnings about a coming crisis.