The U.S. national debt has long been the subject of significant political controversy. Given its rapid rise in recent years following federal spending increases tied to the COVID-19 pandemic, it's easy to understand why the issue is drawing more attention from economists, financial market participants, and critics of government policies.
Polls have long shown high levels of public unease with the U.S. government's debt, which topped $31 trillion in Oct. 2022. The debt has grown in nominal terms and also relative to the U.S. gross domestic product (GDP).
At the same time, a large majority of Americans backed the pandemic relief spending while opposing spending cuts for the costliest government programs. Most also believe they're already paying too much in federal income tax while increasingly backing tax increases for corporations and the rich.
The public debt that people say makes them uncomfortable is the inevitable result of the tax and spending policies that continue to enjoy broad public support. A related problem is that many aren't sure what effect the national debt has or might have on their own lives and finances.
Key Takeaways
- The national debt level of the United States is what the federal government owes its creditors.
- Since the government almost always spends more than it takes in via taxes and other revenue, the national debt continues to rise.
- To finance federal budget deficits, the U.S. government issues government bonds, known as Treasuries.
- The Congressional Budget Office expects the U.S. government's debt financing costs to increase dramatically by 2052 as a result of rising interest rates and mounting budget deficits.
What The National Debt Means To You
National Debt vs. Budget Deficits
As we delve into the consequences of the national debt, it's important to keep in mind that it's different from the federal government's annual budget deficit.
The federal government runs a budget deficit whenever its spending exceeds tax collections and other revenue. To make up the difference, the U.S. Treasury sells treasury bills, notes, and bonds.
The national debt is the aggregate of the federal government's annual budget deficits, minus the rare surpluses.
A Brief History of U.S. Debt
Debt has been a part of this country's history from the beginning, starting with the overseas borrowing undertaken to finance the American Revolution.
Despite the effects of the Vietnam War, War on Poverty social programs, and oil price shocks, the U.S. debt-to-GDP ratio declined from 40% in 1966 to 31% by 1980. It rose to 52% by 1990 in the wake of the tax cuts and spending increases advocated by President Ronald Reagan.
The debt-to-GDP ratio rose from 64% in 2008 to 100% by 2012, amid the fallout from the Great Recession. Bipartisan relief packages in response to the COVID-19 pandemic raised the debt-to-GDP ratio from 107% in late 2019 to 135% by mid-2020; from there the ratio declined to 120% as of Q4 2022.
History shows the debt-to-GDP ratio tends to rise during recessions and in their aftermath, as you would expect. GDP shrinks during a recession, while government tax receipts decline and safety net spending rises.
The combination of higher budget deficits (and therefore faster-growing debt) with lower GDP serves to inflate the debt-to-GDP ratio. Deep recessions like those in the 1980s and in 2008-2009 can have particularly pronounced and prolonged effects on the national debt, making it less sustainable.
Evaluating National Debt
Because the GDP-to-debt ratio is readily accessible, it's widely cited. That doesn't mean it's particularly useful in evaluating the sustainability of national debt without a lot of additional context.
Japan's debt-to-GDP ratio has risen from 100% in the mid-1990s to 220.5% as of 2021 (the latest information available from the World Bank). As of Dec. 2022, the Bank of Japan, the country's central bank, held 52% of the country's government bonds. Countries able to borrow in their own currency need never default except by choice, since they can always monetize the debt by paying it off with newly created money.
Ultimately, how the borrowed money is used may matter more than the absolute level of debt or its proportion to a country's GDP. Government borrowing invested to increase the economy's productive potential might produce returns far exceeding the borrowing costs (or they might not.) Debt incurred to prolong wasteful spending or tax breaks is less likely to deliver long-term benefits.
Some economists, including adherents of Modern Monetary Theory, note that levels of U.S. government debt necessarily reflect the savings preferences of the government bond buyers, including the central banks of countries running trade and current account surpluses with the U.S. as well as U.S. corporations and households.
$31.46 trillion
U.S. national debt as of May 23, 2023.
The Government Is Not Your Family
Government debt is often likened to personal debt to convey concern about its size. But a family can't pay its debts in its own currency the way the U.S. government does, nor does one household's spending play an outsized role in that of others around it. In contrast, government spending is large enough that increases or cuts generate considerable second-order effects.
The paradox of thrift shows how individual choices to save more can end up producing the opposite effect in the aggregate. No paradox is needed to explain why governments adopting fiscal austerity often cause deeper economic downturns, producing larger deficits and ultimately more debt.
Servicing the National Debt
Similarly, households have finite lifespans, and therefore a time-constrained ability to earn money. Prudence may dictate getting out of debt and starting to accumulate retirement savings long before they are needed. Countries, on the other hand, can expect to generate revenue indefinitely, and they are usually able to refinance debt.
Countries must still pay interest on the debt of course, and debt service costs are another useful indicator of debt's sustainability. U.S. debt service costs amounted to 1.87% of GDP in 2022, down from the peak of 3.2% in 1991; however, the Congressional Budget Office projects the federal government's debt service costs will rise to 7.2% of GDP by 2052 as a result of "rising interest and mounting debt."
The National Debt Affects Everyone
If that forecast were to come to pass, the incremental increase over current debt service costs would be roughly equivalent to Social Security's current funding needs at about 5% of U.S. GDP.
This would almost certainly force policymakers to make painful choices, with consequences that would be felt worldwide. It's also possible this scenario won't come to pass because of steps taken in order to avoid it, actions likely to have significant effects in their own right. Or the distant future could look more like the recent past, with investors willing to accept minimal Treasury yields based on the available alternatives.
Just as U.S. currency in circulation is a Federal Reserve liability akin to debt, Treasury obligations may be thought of as an interest-bearing currency. And if cash and Treasury debt are equivalent, then the issuance of U.S. government debt is only material to the extent it incurs future debt service costs.
What Does the National Debt Include?
The national debt is what the federal government owes its creditors, both the public and variousgovernment agencies. The debt is denominated in Treasury bills, notes, and bonds; Treasury Inflation-Protected Securities (TIPS), Floating Rate Notes (FRNs), Government Account Series (GAS), and other securities.
How Much Is the National Debt Per Person?
The national debt stood at $31.46 trillion as of May 23, 2023, according to the U.S. government. As of May 25, 2023, the debt was estimated at $94,986 per citizen, or $248,041 per taxpayer. Countries need only refinance debt, rather than repay it.
Which Country Has the Highest Level of National Debt?
On a debt-to-GDP ratio basis, the country with the highest level of national debt as of 2021 (the latest data from the World Bank) was Greece with debt at 237.1% ofGDP, followed by Japan at 220.5%.
The Bottom Line
The national debt is always a politically charged issue. That's especially true when the amount outstanding nears the congressionally mandated debt ceiling, forcing politicians and financial markets to confront the possibility of a potentially calamitous U.S. debt default if the ceiling is not raised.
It's important to remember that all those trillions of U.S. government debt are interest-bearing assets for the buyers of Treasury bonds. If these investors eventually find alternatives they prefer, it's much more likely to be the result of strong economic growth than of a decline in U.S. creditworthiness.
FAQs
The national debt of a country represents the sum of past annual deficits and the total that it owes creditors. Economists use the ratio of debt to a nation's gross domestic product as an indicator of a country's financial sustainability.
What is the national debt and why is it a problem? ›
A nation saddled with debt will have less to invest in its own future. Rising debt means fewer economic opportunities for Americans. Rising debt reduces business investment and slows economic growth. It also increases expectations of higher rates of inflation and erosion of confidence in the U.S. dollar.
How does the national debt impact me? ›
Congress puts a limit on the debt, which is known as the debt ceiling. When this limit is reached, the government must either raise or suspend the ceiling or reduce the debt. If the national debt gets too high, it could impact you because spending on government programs may be cut, or you may have to pay higher taxes.
Who holds the national debt and why is it important? ›
The Federal Reserve, which purchases and sells Treasury securities as a means to influence federal interest rates and the nation's money supply, is the largest holder of such debt.
What happens when a country has too much debt? ›
Excessive debt can undermine economic performance when it is followed by transfers that are economically suboptimal. More importantly, these transfers can set off financial distress behavior that undermines subsequent growth, in many cases substantially.
How can the US get out of debt? ›
There are a number of methods to reduce the U.S. national debt that go beyond raising taxes and cutting discretionary spending. One of the most controversial is to open the nation's borders to more immigration, kick-starting entrepreneurship and consumption.
How serious is the US national debt? ›
For several years, the nation's debt has been bigger than its gross domestic product, which was $26.13 trillion in the fourth quarter of 2022. Debt-to-GDP is a useful metric for analyzing the debt over long time spans, as it puts the debt into relative terms by comparing it against the size of the national economy.
Why is America in so much debt? ›
Nearly every year, the government spends more than it collects in taxes and other revenue, resulting in a deficit. (The debt ceiling, set by Congress, caps how much the U.S. can borrow to pay for its remaining bills.) The national debt, now at a historic high, is the buildup of its deficits over time.
Why is US national debt so high? ›
Since the government almost always spends more than it takes in via taxes and other revenue, the national debt continues to rise. To finance federal budget deficits, the U.S. government issues government bonds, known as Treasuries.
How can we solve the debt crisis? ›
10 practical steps for debt solution
- Work out a budget and deal with priority debts.
- Consolidate or refinance loans.
- Get help with late-paying customers.
- Gain better control over your cashflow.
- Reduce unnecessary spending.
- Boost your revenue.
- Engage your staff and seek their input.
Essentially, the debt-to-GDP ratio can be reduced in three ways:
- Fiscal austerity (i.e., spending cuts, tax increases or both)
- Negative real return on bonds (i.e., a nominal interest rate that is less than the inflation rate)
- Economic growth (i.e., GDP growing faster than debt)
According to usafacts.org, as of January 2023, Japan owned $1.1 trillion in US Treasuries, making it the largest foreign holder of the national debt. The second-largest holder is China, which owned $859 billion of US debt.
What are the benefits of national debt? ›
When used correctly, public debt can improve the standard of living in a country. It allows the government to build new roads and bridges, improve education and job training, and provide pensions. This encourages people to spend more now instead of saving for retirement. This spending further boosts economic growth.
Who owes the United States money? ›
Many people believe that much of the U.S. national debt is owed to foreign countries like China and Japan, but the truth is that most of it is owed to Social Security and pension funds right here in the U.S. This means that U.S. citizens own most of the national debt.
What country is most in debt? ›
Norway is the country with the highest level of household debt based on OECD data followed by Denmark and the Netherlands.
What would happen if the US stopped paying its debt? ›
Stocks, corporate debt and the value of the dollar would probably plummet. Volatility could be extreme, not just in the United States but across the world. In 2011, around when lawmakers struck a last-minute deal to avoid breaching the debt limit, the S&P 500 fell 17 percent in just over two weeks.
What happens if the US goes over the debt limit? ›
Even short of default, hitting the debt ceiling would hamstring the government's ability to finance its operations, including providing for the national defense or funding entitlements such as Medicare or Social Security.
Can a country refuse to pay its debt? ›
A sovereign default happens when a country's government fails to pay its debt obligations. A sovereign default can have serious economic consequences for the borrowing nation, making it harder and more expensive to borrow money in the future and pay its ongoing obligations.
Has the US ever been debt free? ›
On January 8, 1835, president Andrew Jackson paid off the entire national debt, the only time in U.S. history that has been accomplished.
Does the US ever have to pay off its debt? ›
The US doesn't actually have to pay off its $31 trillion mountain of debt, according to top economist Paul Krugman, hitting back at the idea that government finances can be compared to household balance sheets in an op-ed weeks before the US possibly defaults on some obligations.
There's no law saying you can't move to another country if you have debt—even if it's in collections. But if you've taken on debt in the U.S., you're contractually obligated to pay it, regardless of where you choose to live. Living abroad can make it more difficult for creditors to find you and collect on your debt.
What happens if America defaults? ›
Its debt, long viewed as an ultra-safe asset, is a foundation of global commerce, built on decades of trust in the United States. A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.
How much does the US owe China? ›
Top Foreign Holders of U.S. Debt
| Rank | Country | U.S. Treasury Holdings |
|---|
| 1 | 🇯🇵 Japan | $1,076B |
| 2 | 🇨🇳 China | $867B |
| 3 | 🇬🇧 United Kingdom | $655B |
| 4 | 🇧🇪 Belgium | $354B |
6 more rowsMar 24, 2023
The average American holds a debt balance of $96,371, according to 2021 Experian data, the latest data available.
When was the last time the US had no debt? ›
When was the last time the U.S. was debt free? January 1835 was the first and only time all of the government's interest-bearing debt was paid off, according to the Treasury Department.
Is there any country not in debt? ›
Learning about Countries and Their Debt
The best example can be taken from Hong Kong (it is a one of the debt free countries), whose economy has the least debt to GDP ratio. It is an almost debt free country. It has a well-regulated financial system and large foreign reserves.
Why does the US owe so much money to China? ›
U.S. debt to China comes in the form of U.S. Treasuries, largely due to their safety and stability. Although there are worries about China selling off U.S. debt, which would hamper economic growth, doing so in large amounts poses risks for China as well, making it unlikely to happen.
What does the US spend the most money on? ›
Spending Categories
- 19 % Social Security.
- 15 % Health.
- 14 % Income Security.
- 12 % National Defense.
- 12 % Medicare.
- 11 % Education, Training, Employment, and Social Services.
- 8 % Net Interest.
- 4 % Veterans Benefits and Services.
Pay off your debt and save on interest by paying more than the minimum every month. The key is to make extra payments consistently so you can pay off your loan more quickly. Some lenders allow you to make an extra payment each month specifying that each extra payment goes toward the principal.
What can debt lead to? ›
Debt affects your life financially, emotionally, mentally, and physically. It can cause anxiety, depression, and mental illness. It can cause a host of physical health problems. It can lead to debt denial.
To pay back one million dollars, at a rate of one dollar per second, would take you 11.5 days. To pay back one billion dollars, at a rate of one dollar per second, would take you 32 years. To pay back one trillion dollars, at a rate of one dollar per second, would take you 31,688 years.
Does China have more debt than the US? ›
Therefore, China's national debt has surged almost three times that of the United States in the past 12 months. In the third spot, Japan has a national debt of $13.36 trillion, indicating a drop of $1.49 trillion YoY.
Does China have debt to the US? ›
US Treasury bonds are widely regarded as one of the safest investments on Earth, and China's holdings of US government debt ballooned from $101 billion to peak at $1.3 trillion in 2013. China was the largest foreign creditor to the United States for more than a decade.
Where does the US borrow money from? ›
The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are: Backed by the full faith and credit of the United States government. Offered in a wide range of maturities.
Is China in a debt crisis? ›
China's $23 Trillion Local Debt Crisis Threatens Xi's Economy - Bloomberg.
How much credit card debt does the average American have? ›
How much credit card debt does the average person owe? On average, each U.S. household has $7,951 in credit card debt, as of this analysis. With an average of 2.6 people per household, according to the U.S. Census Bureau, that's about $3,058 in credit card debt per person.
How much does Russia owe the US? ›
How much does Russia owe? About $40 billion US in foreign bonds, about half of that to foreigners. Before the start of the war, Russia had around $640 billion US in foreign currency and gold reserves, much of which was held overseas and is now frozen.
What states are not in debt? ›
States With the Least Debt in 2020
Mountain states, such as Idaho, Montana, Utah and Wyoming made the top-10 list, as did upper Midwest states like Nebraska, North Dakota and South Dakota. Alaska takes the No. 1 spot, with a tiny debt ratio of only 14.2%.
Which states owe the most money? ›
Introduction
| # | State | State Debt |
|---|
| 1 | California | 520 billion |
| 2 | New York | 368 billion |
| 3 | Texas | 324 billion |
| 4 | Illinois | 159 billion |
47 more rowsOn the other end of the spectrum, Brunei has the lowest debt to GDP ratio at 1.90%, followed by the Cayman Islands at 4.50%, Kuwait at 7.10%, and Afghanistan at 7.40%. There are regional trends when it comes to debt to GDP ratios.
Here are the 25 countries with the highest debt-to-GDP ratios:
- Bahamas. Debt to GDP Ratio: 95.6% ...
- United Kingdom. Debt to GDP Ratio: 101% ...
- Mozambique. Debt to GDP Ratio: 101% ...
- Belgium. Debt to GDP Ratio: 105% ...
- France. Debt to GDP Ratio: 112% ...
- Spain. Debt to GDP Ratio: 113% ...
- Canada. Debt to GDP Ratio: 113% ...
- Sri Lanka.
The real value of government debt is its value in terms of a basket of goods and services; it is calculated by dividing the nominal debt value by the price level.
How will national debt affect future generations? ›
Ultimately, the national debt primarily benefits current generations at the expense of future generations. To the extent individuals anticipate a lack of future income due to illness, unemployment, or retirement, they will save a portion of their current income.
What is the most important benefit of debt? ›
There are tax deductions
A strong advantage of debt financing is the tax deductions. Classified as a business expense, the principal and interest payment on that debt may be deducted from your business income taxes.
What country has the most debt? ›
According to data published by London-based investment fintech Invezz, Japan, Greece, Italy, Portugal, and the US are the top five nations with the highest level of government debt.
Is national debt a huge problem? ›
For several years, the nation's debt has been bigger than its gross domestic product, which was $26.13 trillion in the fourth quarter of 2022. Debt-to-GDP is a useful metric for analyzing the debt over long time spans, as it puts the debt into relative terms by comparing it against the size of the national economy.
Who owns most of the national debt? ›
As of January 2023, foreign countries own $7.4 trillion in Treasuries — or roughly 24% of total US debt. Over the past two decades, central banks and other government entities have owned 50-75% of foreign-owned debt over the past two decades. Independent investors and companies held the rest.
Is national debt good or bad? ›
High and rising deficits and debt can lead to persistently high inflation, rising interest rates, slower economic growth, increased interest payments, reduced fiscal space, greater geopolitical risk, and growing generational imbalances. Fortunately, none of these consequences are inevitable.
Who does the US borrow money from? ›
The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are: Backed by the full faith and credit of the United States government.
What generation is currently in the most debt? ›
Credit Karma members closest to midlife carry the most average total debt. Generation X averages $61,036 in debt, followed by baby boomer members, who have an average total debt of $52,401.
While policy makers have thus far, in the long history of our Nation, avoided inflicting such damage on the American and even global economies, virtually every analysis we have seen finds that default leads to deep, immediate recessionary conditions.
Has the US ever not had debt? ›
1837: Andrew Jackson
(In 1835, the $17.9 million budget surplus was greater than the total government expenses for that year.) By January of 1835, for the first and only time, all of the government's interest-bearing debt was paid off.
Does the US need to pay off its debt? ›
The US doesn't actually have to pay off its $31 trillion mountain of debt, according to top economist Paul Krugman, hitting back at the idea that government finances can be compared to household balance sheets in an op-ed weeks before the US possibly defaults on some obligations.
