What the National Debt Means to You

Debt rises when the U.S. spends more than it earns from taxes and other revenue. The public debt results from tax and spending policies that commonly garner public support, but individuals often worry about how the national debt affects their lives and finances.

As of June 3, 2024, the U.S. government's debt was $34.6 trillion, growing in nominal terms and relative to the U.S. gross domestic product (GDP) with a debt-to-GDP ratio of 121.62% as of Q4 2023. It's easy to understand why the issue draws attention from economists, financial market participants, and critics of government policies.

National Debt vs. Budget Deficits

The federal government runs a budget deficit whenever 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 surpluses.

History of U.S. Debt

History shows the debt-to-GDP ratio tends to rise during recessions and in their aftermath. GDP shrinks during a recession while government tax receipts decline and safety net spending rises. The combination of higher budget deficits with lower GDP inflates the debt-to-GDP ratio.

Deep recessions like those in the 1980s and 2008 to 2009 can have particularly pronounced and prolonged effects on the national debt.

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Debt has been used to support significant historical events in the U.S., such as:

• Overseas borrowing to finance the American Revolution
• Tax cuts and spending increases advocated by President Ronald Reagan grew the debt-to-GDP ratio to 52% by 1990.
• The fallout from the Great Recession saw the debt-to-GDP ratio rise from 64% in 2008 to 100% by 2012.
• Response to the COVID-19 pandemic raised the debt-to-GDP ratio from 106% in late 2019 to 133% by Q2 2020; it declined to 121.6% as of Q4 2023.

Servicing the Debt

Households have finite lifespans to earn money. Prudence may dictate getting out of debt and accumulating retirement savings long before they are needed. Countries, however, can generate revenue indefinitely and often refinance debt.

Countries pay interest on the debt, and debt service costs indicate debt sustainability. According to the latest projections from the Congressional Budget Office (CBO), net interest will total $10.5 trillion through 2033, with annual net interest outlays of $1.4 trillion. Net interest will rise from 1.9% of GDP in FY 2022 to 3.6% of GDP by 2033.

Some economists feel governments should adhere to the 25% rule which states that any long-term debt that exceeds 25% of its annual budget is excessive debt and increases default risk. Other economists do not share this view.


Fitch Ratings downgraded the United States' Long-Term Foreign-Currency Issuer Default Rating (IDR) to AA+ from AAA on Aug. 1, 2023, citing the "high and growing general government debt burden" as part of its decision.

How Debt Affects You

Government debt is often likened to personal debt to convey concern about its size. But a family can't pay its debts in its currency like the U.S. government does. How the borrowed money is used may matter more than the absolute level of debt or its proportion to a country's GDP.

The paradox of thrift shows how individual choices to save more can produce the opposite effect in the aggregate. No paradox is needed to explain why governments adopting fiscal austerity often cause deeper economic downturns, creating more significant deficits and, ultimately, more debt. Debt and debt servicing costs force policymakers to make painful choices.

How the borrowed money is used may matter more than the absolute level of debt or its proportion to a country's GDP. During the COVID-19 crisis, Americans backed the pandemic relief spending while opposing spending cuts for the costliest government programs.

Most believe they pay too much in federal income tax while increasingly supporting tax increases for corporations and the rich. Government borrowing invested to increase the economy's productive potential might produce returns far exceeding the borrowing costs, or they might not.

What Does the National Debt Include?

The national debt is what the federal government owes its creditors, both the public and various government agencies. The debt is denominated in Treasury bills, notes, bonds, Treasury Inflation-Protected Securities (TIPS), Floating Rate Notes (FRNs), Government Account Series, and other securities.


What Is Modern Monetary Theory?

Modern monetary theory (MMT) decrees that governments do not rely on taxes or borrowing for spending since they can print as much money as they need. Some economists, including adherents of the theory, note that levels of U.S. government debt don't 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. and U.S. corporations and households.

Which Country Has the Highest Level of National Debt?

According to OECD data, as a percentage of debt-to-GDP, the country with the highest level of national debt in 2022 (latest information) was Japan at 254%. The United States ranked fourth behind Greece and Italy.

The Bottom Line

The national debt is commonly a politically charged issue, especially when the amount outstanding nears the congressionally mandated debt ceiling. Politicians and financial markets must confront the possibility of a devastating U.S. debt default if the ceiling is not raised.