Ownership Of Federal Debt Held By The Public
Investors find federal debt an attractive investment because it is considered to be essentially free of default risk. Treasury securities also are valued for liquiditythey can be bought and sold quickly and in large quantities without affecting their price. At the end of September 2019, domestic investors owned about $9.6 trillion, or 59 percent, of outstanding debt held by the public foreign investors owned about $6.6 trillion, or 41 percent .
How Does Us Debt Compare To That Of Other Countries
The United States debt-to-GDP ratio is among the highest in the developed world. Among other major industrialized countries, the United States is behind only Japan.
The pandemic has sharply increased borrowing around the world, according to the International Monetary Fund. Among advanced economies, debt as a percentage of GDP has increased from around 75 percent to nearly 95 percent, driven by double-digit increases in the debt of the United States, Canada, France, Italy, Japan, Spain, and the United Kingdom .
The United States has long been the worlds largest economy, with no record of defaulting on its debt. Moreover, since the 1940s it has been the worlds reserve-currency country. As a result, the U.S. dollar is considered the most desirable currency in the world.
High demand for the dollar has helped the United States finance its debt, as many investors put a premium on holding low-risk, dollar-denominated assets such as U.S. Treasury bills, notes, and bonds. Steady demand from foreign creditorslargely central banks adding to their dollar reserves, rather than market investorsis one factor that has helped the United States to borrow money at relatively low interest rates. This puts the United States in a more secure position for a fiscal fight against COVID-19 compared to other countries.
How Is The Covid
In response to the pandemic, the federal government has spent trillions of dollars to boost the economy, including on stimulus checks for citizens and aid for businesses and state and local governments. According to the Congressional Budget Office , these measures swelled the federal deficit to $3.1 trillion in 2020, about 15 percent of GDP and the highest level since World War II. Even before the pandemic, the CBO projected that annual deficits would breach the $1 trillion mark in 2020 and remain above that level indefinitely.
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Debt held by the publicthe measure of how much the government owes to outside investorswas $16.9 trillion in 2019. That was more than double the amount in 2007, an increase to almost 80 percent of GDP from 35 percent. Before accounting for spending to combat COVID-19, publicly held U.S. debt was set to nearly double to more than $29 trillion over the next decade. Now, it is about $22 trillion, and its projected to be double the size of the economy by 2051.
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Q& a: Gross Debt Versus Debt Held By The Public
On January 31, 2022, the federal government’s gross debt exceeded $30 trillion for the first time. This mark serves as an important reminder of the nation’s unsustainable rising national debt. At the same time, the nominal amount of gross debt is just one of a few measures of debt and is actually considered less economically meaningful than some other measures such as debt held by the public as a share of Gross Domestic Product . This explainer will lay out everything you need to know about the different measures of debt and what they mean for the government’s fiscal situation.
Chapter : Other Measures Of Federal Debt
Several measures of federal debt other than debt held by the public identify the effects of the governments borrowing on financial markets and inform assessments of the governments financial condition: debt held by the public net of financial assets, gross debt, and debt subject to statutory limit. Another measure, general government net liabilities, is used by the Organisation for Economic Co-operation and Development for international comparisons of its member countries debt .
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Debt Subject To Limit
The rough equivalent of gross debt, debt subject to limit is usually constrained by amounts specified in law: It is the maximum amount of debt that the Treasury can issue to the public or to other federal agencies. The main difference between debt subject to limit and gross debt is that the statutory limit excludes most debt issued by the Federal Financing Bankan arm of the Treasury that can issue up to $15 billion in its own debt. Debt subject to limit also accounts for other adjustments that are excluded from calculations of gross debt.1
Tracking The Federal Deficit: April 2022
The Congressional Budget Office estimates that the federal government ran a surplus of $308 billion in April 2022, the seventh month of fiscal year 2022. This surplus was the difference between $864 billion in receipts and $556 billion in spending. Aprils surplus compares to a $226 billion deficit in April 2021, with the dramatic change primarily due to the winding down of most pandemic relief spending and income tax receipts arriving in April 2022 that were delayed during the last fiscal year. In both 2021 and 2022, May 1 fell on a weekend, shifting some outlays into April that would normally have occurred in May. If not for those shifts, the April 2022 surplus would have been $373 billion and the April 2021 deficit would have been $166 billion. The following discussion excludes the effects of those timing shifts.
Analysis of notable trends: The federal government typically runs a surplus in April, the month when most taxpayers pay individual income taxes. However, due to high levels of pandemic relief spending and the IRSs decision to delay Tax Day in 2020 and 2021, April 2022 marked the first April surplus since 2019.
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Tracking The Federal Deficit: July 2020
The Congressional Budget Office estimates that the federal government ran a deficit of $61 billion in July, the tenth month of fiscal year 2020. Although this Julys deficit was actually smaller than last Julys $120 billion deficit, the change does not represent an improved fiscal condition but a mere timing shift. The deadline for non-withheld individual and corporate income taxes, normally in April, was delayed until July of this year, causing an unusual spike in July revenue . Even this influx of taxes was overcome by monthly outlays that, at $624 billion, were 68% greater than last Julys. The cumulative budget deficit for FY2020 now stands at $2.8 trillion, more than triple the deficit at this point last year.
Analysis of notable trends: Stepping back from monthly fluctuations caused by the change in filing deadlines, total revenue so far this fiscal year is down 1% from this point last year. Revenues through this March had actually been 6% higher than through the same point last fiscal year, as higher individual and corporate earnings led to greater individual and corporate income tax receipts. Then the pandemic hit. From April through July, revenues are 10% lower than over same months last year, a combination of economic damage and legislation that gave individuals and corporations greater tax deductions.
Tracking The Federal Deficit: August 2021
The Congressional Budget Office estimates that the federal government ran a deficit of $173 billion in August, the eleventh month of fiscal year 2021. Because August 1 fell on a weekend this year, certain large federal payments that typically pay out on the first of the month were shifted into late July. If not for this timing shift, the August deficit would have been $233 billion$60 billion greater than reported. Monthly revenues rose 20% compared to last August, primarily due to increased income and payroll tax receipts. Spending increased by 4% year over year, driven by changes in pandemic response spending.
So far this fiscal year, the federal government has run a cumulative deficit of $2.7 trillion, the difference between $3.6 trillion in revenue and $6.3 trillion in spending. This deficit is 10% lower than over the same period in FY2020, but more than 150% larger than the FY2019 deficit at this point in the year.
Analysis of Notable Trends: With one month to go until the close of fiscal year 2021, the federal government is on track to record a somewhat smaller deficit than last year. The economic recovery has buoyed revenues, and the tapering of some large pandemic relief programs has slowed growth in outlays.
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Who Owns This Debt
The public owes 74 percent of the current federal debt. Intragovernmental debt accounts for 26 percent or $5.9 trillion. The public includes foreign investors and foreign governments. These two groups account for 30 percent of the debt. Individual investors and banks represent 15 percent of the debt.
The Federal Reserve is holding 12 percent of the treasuries issued. The Federal Reserve has been purchasing these bonds to keep interest rates low after the 2008 Financial Crisis. States and local governments hold 5 percent of the debt.
Foreign governments who have purchased U.S. treasuries include China, Japan, Brazil, Ireland, the U.K. and others. China represents 29 percent of all treasuries issued to other countries, which corresponds to $1.18 trillion. Japan holds the equivalent of $1.03 trillion in treasuries.
Investing in U.S. treasuries is a deliberate strategy for foreign countries. China has been using these bonds to keep the Yuan weaker than the U.S. dollar and benefit from low import prices. Intragovernmental debt encompasses different funds and holdings.
Some agencies take in revenues and use this money to purchase treasury bonds. This makes the revenues usable by other agencies, and these bonds can be redeemed in the future when these funds and holdings need money.
Risks To Economic Growth
Debt levels may affect economic growth rates. In 2010, economists Kenneth Rogoff and Carmen Reinhart reported that among the 20 developed countries studied, average annual GDP growth was 34% when debt was relatively moderate or low , but it dips to just 1.6% when debt was high . In April 2013, the conclusions of Rogoff and Reinhart’s study came into question when a coding error in their original paper was discovered by Herndon, Ash and Pollin of the University of Massachusetts Amherst. Herndon, Ash and Pollin found that after correcting for errors and unorthodox methods used, there was no evidence that debt above a specific threshold reduces growth. Reinhart and Rogoff maintain that after correcting for errors, a negative relationship between high debt and growth remains. However, other economists, including Paul Krugman, have argued that it is low growth which causes national debt to increase, rather than the other way around.
Commenting on fiscal sustainability, former Federal Reserve Chairman Ben Bernanke stated in April 2010 that “Neither experience nor economic theory clearly indicates the threshold at which government debt begins to endanger prosperity and economic stability. But given the significant costs and risks associated with a rapidly rising federal debt, our nation should soon put in place a credible plan for reducing deficits to sustainable levels over time.”
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Consequences Of Growth In The Debt
If federal debt as a percentage of GDP continues to rise at the pace of CBOs current-law projections, the economy would be affected in two significant ways: Growth in the nations debt would dampen economic output over time, and higher interest costs would increase payments to foreign debt holders and thus reduce the income of U.S. households by rising amounts.
The increases in debt that CBO projects would also pose significant risks to the fiscal and economic outlook, although those risks are not currently apparent in financial markets. In addition, high debt might cause policymakers to feel constrained from implementing deficit-financed fiscal policy to respond to unforeseen events or for other purposes, such as to promote economic activity or strengthen national defense. Negative economic and financial effects that were less abrupt but still significantsuch as expectations of higher inflation or an increased burden of financing public and private activitywould also have a greater chance of occurring. Those effects would worsen the consequences associated with high and rising federal debt.
Not all effects of the projected path of debt are negative, however. In addition to allowing policymakers to maintain current-law spending and revenue policies, that path would cause underlying interest rates to be higher than they otherwise would be, giving the Federal Reserve more flexibility in implementing monetary policy.
Tracking The Federal Deficit: April 2021
The Congressional Budget Office estimates that the federal government ran a deficit of $225 billion in April, the seventh month of fiscal year 2021. Aprils deficit was the difference between $439 billion of revenue and $663 billion of spending. If not for a shift in the timing of some payments because May 1 fell on a weekend, Aprils deficit would have been $165 billion.
So far this fiscal year, the federal government has run a cumulative deficit of $1.9 trillion, the difference between $2.1 trillion of revenue and $4.0 trillion of spending. This deficit is 26% greater than at the same point last fiscal year and 252% greater than at this point in fiscal year 2019.
Analysis of notable trends: In normal years, spending and revenues typically follow similar monthly patternsan influx of individual income taxes arrives in April, corporate income taxes are paid quarterly, refundable tax credits are largely paid in February and March. These patterns allow analysts to gauge changes in federal finances by comparing each months spending and revenues to the same month in the prior year.
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The National Debt Dilemma
- The pandemic has taken the U.S. national debt to levels not seen since the 1940s.
- The United States is in a unique position because it holds the worlds reserve currency, allowing it to carry debt more cheaply than other countries.
- Some experts argue that the United States can safely continue to sustain high levels of debt, while others warn that it will eventually have to face the consequences.
The U.S. national debt is once again raising alarm bells. The massive spending in response to the COVID-19 pandemic has taken the budget deficit to levels not seen since World War II. This expansion follows years of ballooning debttotaling nearly $17 trillion in 2019that will now be even more difficult to reduce. Raising the debt ceiling, the legal limit on government borrowing, has become a perennial fight in Congress.
Cbos Projections Of Debt Held By The Public Net Of Financial Assets
Billions of Dollars
a. Includes other cash and monetary assets , offset by liabilities such as interest accrued but not yet paid to the public.
Most of the growth in financial assets over the coming decade is projected for the outstanding balances on education loans. CBO estimates that, under current law, the Treasury would hold $1.8 trillion in student debt in 2030. The rest of the assets would consist of cash balances and other loans and guarantees held by the government. The outstanding value of those other credit activities is projected to decrease from $186 billion to $89 billion over the 20192030 period, as interest receipts and principal repayments exceed disbursements.
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Debt Held By The Public Net Of Financial Assets
Government spending includes not only payments for services or physical assets, such as real estate or military resources, but also spending that results in the acquisition of financial assets. When the government issues debt to acquire those assetsfor example, to finance student loansits overall financial condition remains roughly unchanged, as does the amount of debt held by the public net of financial assets. If those assets are retained, they generate dividends, payments of interest, and repayments of principal that will reduce the governments need to borrow. If financial assets are sold by the government, the proceeds can be used to pay down a portion of the federal debt. Although calculating the value of those assets is not always straightforward, debt held by the public net of financial assets reflects the governments overall financial condition more comprehensively than other measures can.
When Will Gross Debt Reach The Statutory Limit
Since 1917, the federal government has had a legal limit on the amount of debt it can accrue. The debt limit was most recently reinstated on August 1, 2021 at $28.43 trillion, the level of outstanding debt that day. On December 16, 2021, lawmakers increased the debt limit to $31.38 trillion. During the intervening period, the Treasury Department was able to use “extraordinary measures.”
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Why Is The National Debt So High
When the federal government spends more than it takes in, we have to borrow money to cover that annual deficit. And each years deficit adds to our growing national debt.
Historically, our largest deficits were caused by increased spending around national emergencies like major wars or the Great Depression.
Are There Other Measures Of Federal Debt
There are several lesser known measures of federal debt besides gross debt and debt held by the public. One is debt held by the public net of financial assets. This measure subtracts the government’s financial assets most significantly its student loan holdings, but also any stocks or bonds it may own from its liabilities. For perspective, in FY 2020, financial assets totaled $2.9 trillion, so debt held by the public net of financial assets totaled roughly $18.1 trillion, or 86 percent of GDP. While debt held by the public net of financial assets does give a more comprehensive picture of federal finances, it may be difficult to calculate accurately, it excludes nonfinancial assets like land and buildings, and it does not show the extent to which the government is leveraged.
Another measure of debt is debt subject to the limit. This measure, which matters for determining when the federal government reaches the statutory debt ceiling, is broadly similar to gross federal debt. However, debt subject to the limit excludes debt issued by agencies other than Treasury and is adjusted for the unamortized discount on certain Treasury securities, making it about $30 billion lower than gross debt.
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