Rising Federal Debt and the Future of the US Economy (2024)

FAQs

How will the US debt affect the economy? ›

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.

Today's higher interest rate environment has magnified the issue related to growing U.S. federal government debt. While expanding debt has long been a concern, it tends to gain more attention during election years, and also at times when the government's interest costs become more significant.

Tax cuts, stimulus programs, increased government spending, and decreased tax revenue caused by widespread unemployment generally account for sharp rises in the national debt. Visit the Historical Debt Outstanding dataset to explore and download this data.

Reduced Public Investment.

As more federal resources are diverted to interest payments, there will be less available to invest in areas that are important for economic growth.

Acknowledging these uncertainties, more recent observations suggest that large increases in the debt‐​to‐​GDP ratio could lead to much higher taxes, lower future incomes, and intergenerational inequity (Boskin 2020).

The U.S. national debt has soared to historic levels relative to the size of the U.S. economy. Many economists say that a rapidly mounting debt load could soon diminish U.S. economic growth, restrict government spending on important programs, and raise the likelihood of financial crises.

As we have discussed elsewhere, government debt reduces economic activity by crowding out private capital formation and by requiring future tax increases or spending cuts to accommodate future interest payments.

Relative to the size of the economy, U.S. federal debt is larger now than at any time since the end of World War II. Under current policies, the debt is expected to climb from around 75 percent of the Gross Domestic Product today to over 120 percent by 2040, and keep growing after that.

Why History Shows the United States Will Not Grow Out of Its Debt. The United States is approaching record levels of debt. Debt held by the public totaled 97 percent of gross domestic product (GDP) at the end of 2022 and is on track to exceed its previous all-time high, which occurred just after World II, by 2029.

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.

What would happen if the US paid off its debt? ›

Answer and Explanation:

If the U.S. was to pay off their debt ultimately, there is not much that would happen. Paying off the debt implies that the government will now focus on using the revenue collected primarily from taxes to fund its activities.

Decreased savings and income

The government's need to borrow will eventually exceed the savings available, and even though more households and businesses are purchasing treasury securities, national savings will reach a low point in comparison to the size of the federal debt.

One of the main culprits is consistently overspending. When the federal government spends more than its budget, it creates a deficit. In the fiscal year of 2023, it spent about $381 billion more than it collected in revenues. To pay that deficit, the government borrows money.

Interest Rates. Maintaining interest rates at low levels can help stimulate the economy, generate tax revenue, and, ultimately, reduce the national debt. Lower interest rates make it easier for individuals and businesses to borrow money for goods and services, which creates jobs and increases tax revenues.

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.

Debt itself is inherently inflationary, meaning consumers can expect higher prices if the government doesn't slow its borrowing. That's because debt provides a measure of stimulus to the economy, which speeds up hiring and wage growth.

High reliance on debt can lead to adverse effects such as debt-deflationary recession, balance sheet recession, cyclical fluctuations in the economy, and decreased efficiency of firms.