What Is National Debt?
National debt denotes the outstanding obligations of a country. Such obligations may also be called government debt, federal debt, or public debt.
The national debt of the United States is what the federal government owes creditors—including debt held by the public and federal government trust funds. U.S. national debt totaled $30.5 trillion as of July 15, 2022.
- The national debt of a country is the total it owes creditors.
- Economists tend to focus on the ratio of debt to gross domestic product (GDP) as an indicator of its sustainability.
- Countries borrowing in a currency they control can choose to issue additional currency to repay debt.
- Rising interest costs and Social Security deficits are likely to exacerbate rapidly growing U.S. budget shortfalls in the coming years.
Understanding National Debt
The nominal level of the national debt in dollars is generally viewed as less important than its proportion to the country's gross domestic product (GDP), the debt-to-GDP ratio. That's because a country's tax base grows alongside its economy, increasing revenue the government can raise to service the debt.
The U.S. national debt as of July 15, 2022.
In addition, economic growth tends to increase the demand for government bonds. Public borrowing accommodates the net savings of households and corporations, meeting their demand for safe assets—debt securities expected to hold their value over time.
National Debt vs. Budget Deficit
It's important to understand the difference between the federal government's annual budget deficit (also known as the fiscal deficit) and the national debt. The federal government generates an annual deficit when its spending over the course of a year exceeds government revenue from sources including taxes on personal income, corporate income and payroll earnings.
When annual congressional appropriations exceed federal revenue, the U.S. Treasury finances the deficit by issuing Treasury bills, notes, and bonds. These Treasury products may be purchased by investors including individuals and pension funds; banks, insurers and other financial institutions; and the Federal Reserve as well as foreign central banks.
National debt is the sum of such annual budget deficits (and any offsetting surpluses.) It is the total amount of money a country owes creditors.
Forms of Government Borrowing
In addition to selling Treasury bills, notes, and bonds, the U.S. government borrows by issuing Treasury Inflation-Protected Securities (TIPS) and Floating Rate Notes (FRNs). Its borrowing instruments also include savings bonds as well as the government account securities representing intergovernmental debt.
Managing National Debt
In the U.S., national debt is capped by the congressionally mandated debt ceiling, which requires Congress to approve borrowing above the limit notwithstanding its prior approval of the appropriations responsible for the debt ceiling breach.
The U.S. Treasury publishes the value of outstanding public debt subject to the debt ceiling daily based on reports received at the end of the previous day from some 50 sources, including Federal Reserve Bank branches, tallying the government securities sold and redeemed that day.
Conventional strategies for reducing the national debt focus on some combination of reduced spending and policies promoting faster economic growth, which can in turn increase government revenue. More radical (and usually costly) solutions, most often undertaken by governments struggling with unsustainable debt, include a formal debt restructuring, debt monetization, or an outright default.
Central banks purchasing their own government's debt monetize it by paying for the obligations with the currency they issue. Governments and central banks may also monetize long-term fixed debt by increasing the rate of inflation. Some have argued low interest rates can serve the same end, describing them as "financial repression." Interest rates are a byproduct of economic conditions rather than government policies aimed at reducing debt service costs, however.
A Brief History of U.S. Debt
Nearly all national governments borrow money. The U.S. has carried national debt throughout its history, dating back to the borrowing that financed the Revolutionary War. Since then the debt has grown alongside the economy, as a result of increased government responsibilities, and in response to economic developments.
U.S. national debt-to-GDP as of Q1 2022.
The Congressional Budget Office projects federal debt held by the public to slip from 100% of GDP at the end of 2021 to 96% two years later as a result of economic growth and inflation. From there, debt held by the public as a percentage of the GDP is forecast to increase to 110% by 2032 and 185% in 2052, based on the federal budget's current revenue and spending trends.
Note that federal debt held by the public is considered more meaningful than national debt, because it excludes intragovernmental debt—that is, it only accounts for U.S. debt held by entities other than the federal government. So while national debt totaled $30.5 trillion as of July 15, 2022, federal debt held by the public was $23.9 trillion and intragovernmental debt amounted to $6.6 trillion. Thus, while national debt-to-GDP was at 124.7% as of Q1 2022, the ratio of federal debt to GDP counting only debt held by the public was 98%.
The ratio of U.S. federal debt held by the public relative to GDP has fluctuated widely, from less than 15% just before the Great Depression to more than 100% in the wake of World War II and back down to roughly 25% during the 1970s.
The ratio then rose to nearly 48% by 1993 before falling to 31.5% by 2001. It has since risen at an accelerating pace, propelled higher by the consequences of the Great Recession, the Tax Cuts and Jobs Act, and the COVID-19 pandemic.
The Politics of National Debt
Disagreements about national debt have repeatedly preoccupied U.S. Congress. Whenever the national debt approaches the limit periodically reset by Congress, lawmakers are faced with a choice of raising the ceiling once again or letting the U.S. government default on its obligations, risking dire economic consequences. The U.S. government briefly shut down before Congress raised the limit in 2013. A similar standoff two years earlier led Standard & Poor's to downgrade its U.S. credit rating.
In 2021, Congress narrowly averted a scheduled Oct. 1 government shutdown by passing a short-term funding bill, then raised the U.S. debt ceiling (which includes intragovernmental debt) by $2.5 trillion to $31.4 trillion in December. That limit was expected to be reached in early 2023.
Americans profess to be concerned about the national debt in poll after poll, while also overwhelmingly supporting defense spending and outlays for Social Security and Medicare, and opposing tax increases.
As a result, elected officials too have been eager to be seen to be addressing the national debt, usually without linking it to the spending the debt enables or to the tax increases that a balanced budget would require.
For example, when U.S. President Joe Biden highlighted his administration's efforts to reduce the budget deficit in May 2022, he pointed to the U.S. Treasury's plans to pay down the national debt by $26 billion in Q2 2022. The rare planned quarterly paydown followed net federal borrowing of $668 billion in privately-held marketable debt in Q1 2022, and preceded a projected $182 billion in such borrowing for Q3 2022. The U.S. government's cash flow seasonally improves in the second quarter of most years as a result of receipts associated with the April income tax filing deadline.
Approximate U.S. national debt per capita as of July 2022.
Taking National Debt Personally
While voters are not fans of national debt on principle, the debt-to-GDP ratio makes for a lackluster rallying point in practice, since even economists can't agree on what percentage is too high.
Hence efforts to frame the national debt burden in easily understood terms. One popular tactic is to divide national debt by the population to determine debt per capita. Dividing the U.S. national debt of $30.5 trillion as of July 2022 by an estimated U.S. population of 332.4 million as of Jan. 1, 2022 yields national debt per capita of nearly $92,000, which sounds like a lot.
Fortunately, the per capita apportionment of government debt ignores the fact that no individual, not even a child, can hope to repay debt in a currency they create, the way the U.S. government and many other sovereign borrowers do. The improbability of default by a sovereign borrowing in its own currency is what marks out such debt as a "safe asset" relative to credit issued to private borrowers. In this sense, national debt can be thought of as an interest-bearing currency supplementing the interest-free banknotes. Like currency, national debt is a government obligation serving as an asset and store of value for its owners.
How Bad Is National Debt?
Americans living with high levels of government and private debt tend to see saving in a positive light, while treating borrowing as a problem. In fact, they go hand in hand since borrowings come from savings and provide savers with the interest they earn from deferring consumption.
U.S. national debt provides corresponding low-risk assets for pension funds and families, and enables consumption in excess of production for the country as a whole.
At the same time, nothing more than simple arithmetic is required to see the pace of the recent growth of government debt as unsustainable. That's the term the U.S. Treasury used in the Financial Report of the U.S. Government for Fiscal Year 2021, after calculating that under prevailing trends the federal debt-to-GDP ratio would increase from 100% in 2021 to 701% by 2096.
Economists and policy analysts on the left often differ from those on the right in evaluating the tradeoffs between the everyday utility of government debt and its growing risks amid rapid accumulation.
Critics of public debt often contend it can crowd out private investment, a theory not supported by U.S. credit markets developments in recent decades. In contrast, economists using Modern Monetary Theory (MMT) argue government borrowing can improve economic outcomes if it fosters public investment that expands the economy's productive potential.
The bond market renders its own collective judgment daily, setting bond yields based on the level of government debt, the pace of its growth and the demand for government bonds from private buyers, among other factors.
Proponents of Modern Monetary Theory (MMT) argue sovereign borrowers can sustain the deficit spending required to ensure full employment, while using fiscal policy to control inflation.
What the Government Spends Money On
Since national debt is the sum of past deficit spending, it's worth considering the major costs driving U.S. budget deficits. The major outlays were as follows in fiscal 2021:
Income Security and COVID-19 Relief
Income security spending of $1.6 trillion was boosted by $569.5 billion in pandemic relief payments and $79 billion in child tax credit payments. It also included $397.9 billion for unemployment compensation, $168.1 billion on food and nutrition assistance, $89.8 billion in housing assistance, and $156.1 billion in federal employee retirement and disability costs.
Medicare, Medicaid, and Other Healthcare
Medicare and Medicaid, the government health insurance programs covering care for U.S. residents 65 and older and those meeting low-income thresholds respectively, consumed the bulk of the $1.4 trillion allocated to healthcare spending in 2021.
Social Security Program and Disability Pensions
Aimed at providing financial security to the retired and disabled, total Social Security and other expenditures are approximately $1.1 trillion.
Military spending totaled $754.8 billion in 2021.
Net Interest Costs
Interest expense for the national debt totaled $562.4 billion in 2021, offset by $210.1 billion in interest and investment income.
Other Miscellaneous Expenses
The federal government also spends money on transportation, veterans' benefits, foreign aid, and public education.
What Makes the Debt Bigger?
The leading federal spending categories currently—Social Security, Medicare/Medicaid and defense—are the same as in the 1990's, when national debt was much lower relative to GDP. The U.S. remains the world's largest economy and one of the richest countries. How, then, did the debt situation deteriorate? Numerous factors are in play.
Large tax cuts passed by Congress during the presidencies of George W. Bush and Donald Trump have played a large part in the subsequent deterioration of government finances and the resulting growth in the national debt.
The Bush tax cuts of 2001 and 2003 had a combined estimated 10-year cost of about $1.6 trillion. In 2012, the Congressional Budget Office estimated the cost of extending them through 2022 at nearly $4.8 trillion. The American Taxpayer Relief Act Of 2012 made the bulk of the tax cuts passed in 2001 and 2003 permanent. In 2018, Democrats on the Senate Budget Committee estimated those tax cuts' annual cost at $488 billion.
The Tax Cuts and Jobs Act of 2017 was expected to increase budget deficits by a cumulative $1.9 trillion through 2028, the Congressional Budget Office (CBO) estimated in 2018. By the fall of 2019, the CBO had lowered its revenue projections for the period by an additional $700 billion, taking the total estimated cost of the 2017 tax cuts to $2.6 trillion over 11 years.
Healthcare Cost Inflation
The disproportionate amount the U.S. spends on healthcare is a major contributor to the national debt:
- The U.S. spends far more than other rich nations on healthcare in absolute terms and relative to the size of its economy and population. U.S. healthcare spending amounts to more than 17% of GDP, up from 10% in the mid-1980s and above Germany's 11% as well as the U.K.'s 9.6%.
- Per-capita healthcare spending nearly quadrupled (after adjusting for inflation) between 1980 and 2018, growing 3.6% annually in real terms.
- This rise in healthcare costs has weighed heavily on government finances as public health spending, primarily on Medicare and Medicaid, increased from 32% of total U.S. health spending in 1987 to 51% by 2020.
- Healthcare spending accounts for roughly a quarter of government spending, up from 12% in 1990.
- Medicare spending alone was 15% of total federal spending in 2018 and was projected to rise to 18% by 2029.
Wars in Iraq and Afghanistan
Overseas wars and military operations launched after the Sept. 11, 2001, attacks in the U.S., in combination with increased domestic security spending, interest costs, and long-term veterans funding obligations, has added about $8 trillion to the national debt since 2001, by one estimate.
Meanwhile, annual U.S. military spending exceeds that of the next nine highest spenders combined.
Social Security System Strains
For decades, payroll tax receipts earmarked for Social Security have exceeded benefit payments, producing system surpluses that have masked the structural U.S. budget deficit.
But those surpluses shrank before turning into a shortfall in 2021, and in the near future the deficits are expected to increase as Baby Boomer retirements swell the ranks of Social Security recipients.
The Old-Age and Survivors Insurance Trust Fund funding the Social Security payments for retirees saw annual gains that peaked at about $180 billion in 2006-2008. Those surpluses are projected by the trust fund's board of trustees to give way to growing deficits topping $200 billion annually by 2028 and $300 billion from 2031. In combination with payroll taxes, the $2.75 trillion trust fund is expected to finance full benefit payments until it is exhausted in 2034.
Growing life expectancy and reduced fertility rates are expected to reduce the share of working-age population from 58.3% in 2021 to 54.6% by 2050. Over the same span, the ratio of working-age Americans to those of retirement age is projected to drop from 3.4-to-1 to 2.6-to-1.
According to the 2022 Trustees Report, the Social Security Trust Funds are likely to be depleted by 2035, a year later than the previous report's projection. At that point, benefits would need to be reduced by 25% to match receipts or payroll taxes increased by 33% to match benefit payments, unless lawmakers opt for a combination of tax increases and benefit cuts, according to the trustees.
Consequences of Growing National Debt
Japan's experience shows sovereigns can incur a surprising amount of debt if the country's central bank is willing to monetize the borrowing, and so long as it doesn't stoke inflation.
But even if we discount the remote risk of a default, rising debt imposes higher interest costs, especially when interest rates rise. The CBO expects the U.S. government's net interest costs to triple over the next decade, reaching $1.2 trillion annually by 2032.
That will force lawmakers to decide between running even larger deficits just to keep spending and revenue constant, or some combination of spending cuts and revenue increases.
If the choice is even larger deficits, bond buyers might require higher yields to compensate them for the resulting increase in risk. Or they may not, if slowing economic growth prompts investment flows into fixed income amid expectations of lower interest rates.
The Bottom Line
Most countries have a national debt, and in the aftermath of the global financial crisis and the COVID-19 pandemic the debt of many governments has grown much faster than the national economy.
Such trends can go on for a long time and longer than investors might expect, but they do have their limits. The economic adjustments required in the wake of unsustainable debt binges are often excessively painful, as the citizens of Greece, Lebanon, and many other countries can attest.
While fiscal deficits in times of economic stress can have positive long-term effects, persistent over-consumption in good times as well as lean ones seldom ends well. Sovereign borrowers must manage national debt responsibly to keep its long-term costs and risks in check.
Are the National Debt and the Budget Deficit the Same Thing?
No. The national debt is the sum of a nation's annual budget deficits, offset by any surpluses. A deficit occurs when the government spends more than it raises in revenue. To finance the deficit, the government borrows money by selling debt obligations to investors.
Who Decides How Much Interest the U.S. Pays on Its Debt?
Supply and demand. In other words, the marketplace. When the government needs to raise debt financing, it sells debt securities in an auction. Bidders offer to buy the debt for a specific rate, yield, or discount margin, and all successful bidders receive the highest yield or discount the Treasury accepts. Government debt buyers may include central banks, though their goal is typically to foster sustainable economic growth rather than to finance deficit spending.
How Much Interest Does the U.S. Pay on Its Debt Each Year?
The U.S. government paid $562.4 billion in interest in fiscal 2021, while earning $210.1 billion in interest and investment income. Its net interest costs are expected to increase to $1.2 trillion annually by 2032.