The term "national debt" refers to the outstanding financial obligation of a country. The national debt is what the federal government owes its creditors. It's made up of different types of debt, such as that which is held by the public and federal government trust funds.
The national debt represents the sum of past annual budget deficits reduced by annual budget surpluses. U.S. national debt totaled around $35.8 trillion as of October 2024.
Key Takeaways
- The national debt is the total amount of money that a country owes creditors. It represents the sum of past deficits.
- Economists focus on the ratio of debt to a nation’s gross domestic product as an indicator of its sustainability.
- The federal government’s annual budget deficit, or its fiscal deficit, differs from the national debt.
- Federal debt is held primarily by the American public, followed by foreign governments and U.S. banks and investors.
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Understanding National Debt
Debt is a financial obligation that one entity owes to another. Individuals, businesses, and governments take on debt to support themselves, make purchases, or invest in future growth. Consumer debt includes credit cards, loans, and mortgages. Corporations can take out debt in the form of lines of credit and corporate loans among other sources.
Government debt is known as national debt or as federal or public debt. It's money borrowed by the government to pay for its expenses. The national debt in the U.S. is primarily held by the public, followed by foreign governments, banks, and investors.
America's national debt in dollars is generally viewed as less important than its proportion to the country’s gross domestic product (GDP) or the debt-to-GDP ratio because a country’s tax base grows alongside its economy. It increases revenue that the government can raise to service the debt. The U.S. national debt-to-GDP was 120.04% at the close of the second quarter of 2024.
The federal government’s annual budget deficit differs from the national debt. The deficit occurs when spending throughout the year exceeds government revenue from sources that include taxes on personal income, corporate income, and payroll earnings.
Government Spending
The U.S. government spent more than it collected during the 2023 fiscal year. The total bill for the year was $6.13 trillion and this created a deficit. Federal spending equaled 22.8% of the total GDP in 2023. The government funds goods, programs, and services each year that support the United States and the interest it's incurred on outstanding federal debt.
The U.S. spends more than other wealthy nations on healthcare relative to the size of its economy and population. U.S. healthcare spending of 16.6% of GDP is more than Germany’s 12.7% and Japan's 11.5%. These are 2022 numbers, the latest available for comparison. In 2023, annual U.S. military spending exceeded that of the next 10 highest spenders combined.
The top categories and percentages of federal spending as of FYTD 2024 include:
- Social Security: 22%
- Net Interest: 14%
- Health: 13%
- National Defense: 13%
- Medicare: 13%
- Income Security: 10%
- Veterans Benefits and Services: 5%
- Education, Training, Employment, and Social Services: 5%
- Transportation: 2%
- Community and Regional Development: 1%
- Other: 3%
The Growing National Debt
During the American Revolutionary War, the U.S. incurred a debt that continued to grow until 1835 with the sale of federally-owned lands and cuts to the federal budget. The debt grew over 4,000% during the Civil War, increasing from $65 million in 1860 to $2.7 billion shortly after the war ended in 1865.
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The debt grew steadily into the 20th century and further into the 21st century. Events that triggered large spikes in debt include the Afghanistan and Iraq Wars, the 2008 Great Recession, and the COVID-19 pandemic. Certain programs and activities strain government funding and add to the growing debt.
Social Security and Medicare
Deficits are expected to increase as baby boomer retirements swell the ranks of Social Security recipients. Four trust funds house Social Security and Medicare program income. The reserves held in the trust funds and program income from financing sources, such as the payroll tax, are used to pay benefits.
The Old-Age and Survivors Insurance (OASI) Trust Fund that supports Social Security payments can sustain 100% of total scheduled benefits until 2033. The Disability Insurance (DI) Trust Fund is projected to pay 100% of total scheduled benefits through 2098.
Medicare spending is 13% of total federal spending as of FYTD 2024. The Hospital Insurance (HI) Trust Fund for Medicare recipients will be able to pay 100% of scheduled benefits until 2036. The Supplemental Medical Insurance Trust Fund is financed into the indefinite future because its financing sources include premiums on beneficiaries and Treasury contributions.
Note
Tax cuts, stimulus programs, increased government spending, and decreased tax revenue caused by widespread unemployment account for sharp rises in the national debt.
Tax Cuts
Tax cuts passed by Congress have historically played a large part in the growth of the national debt. The Bush tax cuts of 2001 and 2003 had a combined estimated 10-year cost of about $1.7 trillion. The American Taxpayer Relief Act of 2012 made the bulk of the tax cuts passed in 2001 and 2003 permanent.
Democrats on the Senate Budget Committee estimated the annual cost of those tax cuts as $488 billion in 2018. The Tax Cuts and Job Act (TCJA) of 2017 is expected to increase budget deficits by a cumulative $1.9 trillion through 2028, according to Congressional Budget Office (CBO) estimates.
Government Borrowing
Periods of economic growth tend to increase the demand for government bonds. Public borrowing accommodates the net savings of households and corporations, meeting their demand for safe assets or debt securities that are expected to hold their value over time.
The U.S. government borrows by issuing Treasury Inflation-Protected Securities (TIPS) and Floating Rate Notes (FRNs) in addition to selling Treasury bills, notes, and bonds. Its borrowing instruments also include savings bonds, as well as government securities that represent intergovernmental debt.
Other nations have borrowed from international organizations like the International Monetary Fund (IMF), The World Bank, and private financial institutions.
Governed by the Constitution, lawmakers must raise the debt ceiling when the national debt approaches the limit that's periodically reset by Congress. This avoids a government shutdown and the risk that the U.S. government will default on its obligations.
Managing National Debt
The national debt in the United States is legally capped by the congressionally mandated debt ceiling that requires Congress to approve borrowing above the limit notwithstanding its prior approval of the appropriations responsible for the debt ceiling breach.
Conventional strategies for reducing the national debt focus on a combination of reduced spending and policies to promote economic growth. Radical solutions undertaken by governments struggling with unsustainable debt include a formal debt restructuring, debt monetization, or default. Controversial methods include opening borders to spur new consumption, raising the age for benefits like Social Security, and implementing a national sales tax.
The Public's Debt
The ratio of debt held by the public relative to GDP fluctuated from less than 15% just before the Great Depression to more than 100% in the wake of World War II. It went back down to roughly a 25% ratio of debt during the 1970s. The ratio 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 TCJA, and the COVID-19 pandemic.
Voters may dislike the national debt but the debt-to-GDP ratio makes for a lackluster rallying point in practice. Even economists can’t agree on what percentage is high. Americans profess to be concerned about the national debt when they're polled even as they overwhelmingly support defense spending and outlay for Social Security and Medicare and oppose tax increases.
You can determine debt per capita or the national debt per person by dividing the U.S. national debt of about $35.8 trillion as of October 2024, by an estimated U.S. population of 337 million. This yields a national debt per capita of about $106,231.
Consequences of National Debt
Rising debt imposes higher interest costs. The CBO expects the U.S. government’s net interest costs to triple over the next decade, reaching $1.2 trillion annually by 2032. This 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.
Bond buyers might require higher yields to compensate them for the resulting increase in risk if the choice is even larger deficits. Or they may not if slowing economic growth prompts investment flows into fixed income amid expectations of lower interest rates.
Are the National Debt and the Budget Deficit the Same Thing?
No. The deficit and the national debt are different, although they're related. 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. The government borrows money by selling debt obligations to investors to finance its budget deficit.
Who Decides How Much Interest the U.S. Pays on Its Debt?
Supply and demand make the decision. The government sells securities in an auction when it needs to raise debt financing. Bidders offer to buy the debt for a specific rate, yield, or discount margin and all successful bidders receive the discount that the Treasury accepts. Government debt buyers can include central banks although their goal is typically to foster sustainable economic growth rather than to finance deficit spending.
What Is Modern Monetary Theory?
Economists use Modern Monetary Theory (MMT) to argue that government borrowing can improve economic outcomes if it fosters public investment that expands the economy’s productive potential.
How Does the U.S. Fund the Annual Deficit?
The U.S. Treasury finances the deficit by issuing Treasury bills, notes, and bonds when annual congressional appropriations exceed federal revenue. Treasury products are purchased by investors such as individuals, pension funds, banks, insurers, other financial institutions, the Federal Reserve, and foreign central banks.
The Bottom Line
The national debt of a country represents the sum of past annual deficits and the total that it owes its creditors. Economists use the ratio of debt to a nation’s gross domestic product as an indicator of a country's financial sustainability. The national debt in the United States is primarily held by the American public, followed by foreign governments, U.S. banks, and investors.
