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 creditorsincluding debt held by the public and federal government trust funds. U.S. national debt totaled $30.5 trillion as of July 15, 2022.
Tracking The Federal Deficit: June 2021
The Congressional Budget Office estimates that the federal government ran a deficit of $173 billion in June, the ninth month of fiscal year 2021. Junes deficit was the difference between $450 billion in revenue and $623 billion in spending.
So far this fiscal year, the federal government has run a cumulative deficit of $2.2 trillion, the difference between $3.1 trillion in revenue and $5.3 trillion in spending. This deficit is nearly triple the shortfall over the same period in FY2019 , but is 19% lower than at the same point in FY2020. This is the first time in FY2021 that the cumulative deficit has decreased year-over-year.
Analysis of Notable Trends: Thus far in FY2021, year-over-year comparisons of deficit levels have largely reflected the trajectory of the COVID-19 pandemic and subsequent federal response. BPC expects this trend to continue through the rest of the fiscal year.
Cumulative year-to-date outlays are up 6% compared to the first nine months of FY2020 and are 58% greater than at this point in FY2019. These changes are indicative of continued spending towards COVID-19 relief programsin particular, refundable tax credits and supplemental unemployment compensationas every month to date in the current fiscal year has contained pandemic-related expenditures, whereas only March-June did for the relevant period last year.
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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Tracking The Federal Deficit: August 2020
The Congressional Budget Office estimates that the federal government ran a deficit of $198 billion in August, the eleventh month of fiscal year 2020. This deficitthe difference between $223 billion of revenues and $420 billion of outlaysis $3 billion less than last Augusts, although this apparent improvement is an illusion created by shifts in the timing of certain payments. Without these timing shifts, this Augusts deficit would have been $106 billion greater than last Augusts. The cumulative deficit in FY2020 has risen to $3.0 trillion, an increase of $1.9 trillion from this point last year.
Analysis of notable trends: Cumulative revenue for the fiscal year is down 1% from this point last year, while cumulative outlays are 46% higher. August repeated this asymmetry, with revenues 2% lower than last Augusts and outlaysnetting out the timing shifts described above27% higher.
Thanks to a strong economy, this years revenue through March had been running 6% above last years. Then COVID-19 hit, and revenues from April through August have come in 9% lower than last year, due to both the loss in economic activity and legislation responding to the pandemic.
CBO now projects that the total deficit this fiscal year will run to $3.3 trillion, more than triple last years and the largest deficit as a share of the economy since 1945.
Public Debt And Intragovernmental Holdings
Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact.
The Social Security Trust Fund owns a significant portion of U.S. national debt, but how does that work and what does it mean? Below, we’ll dive into who actually owns the U.S. national debt and how that impacts you.
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Us National Debt Tops $30 Trillion For First Time In History
The Treasury Department this week reported that the total national debt of the United States surpassed $30 trillion for the first time in history, an amount equal to nearly 130% of America’s yearly economic output, known as gross domestic product. The eye-popping figure makes the U.S. one of the most heavily indebted nations in the world. The federal debt has been high and rising for decades, but the federal government’s response to the coronavirus pandemic, which involved massive infusions of cash into the U.S. economy, greatly accelerated its growth. At the end of 2019, prior to the pandemic, the national debt stood at $22.7 trillion. One year later, it had risen by an additional $5 trillion, to $27.7 trillion. Since then, the nation has added more than $2 trillion in further debt. A grim reminder
While the $30 trillion figure, by itself, has no significant meaning, it may serve to focus attention on what some see as a major concern for the future health of the country. “Hitting the $30 trillion mark is a reminder of just how high our debt is and just how much we’ve been borrowing,” said Marc Goldwein, senior vice president and senior policy director for the Committee for a Responsible Federal Budget.
Concerns Over Chinese Holdings Of Us Debt
According to a 2013 Forbes article, many American and other economic analysts have expressed concerns on account of the People’s Republic of China’s “extensive” holdings of United States government debt as part of their reserves. The National Defense Authorization Act of FY2012 included a provision requiring the Secretary of Defense to conduct a “national security risk assessment of U.S. federal debt held by China.” The department issued its report in July 2012, stating that “attempting to use U.S. Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States. An August 19, 2013 Congressional Research Service report said that the threat is not credible and the effect would be limited even if carried out. The report said that the threat would not offer “China deterrence options, whether in the diplomatic, military, or economic realms, and this would remain true both in peacetime and in scenarios of crisis or war.”
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A Brief History Of Us Debt
Investopedia / Sabrina Jiang
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.
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 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.
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Raising Reserve Requirements And Full Reserve Banking
Two economists, Jaromir Benes and Michael Kumhof, working for the International Monetary Fund, published a working paper called The Chicago Plan Revisited suggesting that the debt could be eliminated by raising bank reserve requirements and converting from fractional-reserve banking to full-reserve banking. Economists at the Paris School of Economics have commented on the plan, stating that it is already the status quo for coinage currency, and a Norges Bank economist has examined the proposal in the context of considering the finance industry as part of the real economy. A Centre for Economic Policy Research paper agrees with the conclusion that “no real liability is created by new fiat money creation and therefore public debt does not rise as a result.”
The debt ceiling is a legislative mechanism to limit the amount of national debt that can be issued by the Treasury. In effect, it restrains the Treasury from paying for expenditures after the limit has been reached, even if the expenditures have already been approved and have been appropriated. If this situation were to occur, it is unclear whether Treasury would be able to prioritize payments on debt to avoid a default on its debt obligations, but it would have to default on some of its non-debt obligations.
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 argue government borrowing can improve economic outcomes if it fosters public investment that expands the economy’s productive potential.
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Tracking The Federal Deficit: January 2020
The Congressional Budget Office reported that the federal government generated a $32 billion deficit in January, the fourth month of fiscal year 2020. Januarys deficit is a $40 billion change from the $9 billion surplus recorded a year earlier in January 2019. Januarys deficit brings the total deficit so far this fiscal year to $388 billion, which is 25% higher than the same period last year . Total revenues so far in FY2020 increased by 6% , while spending increased by 10% , compared to the same period last year. (After accounting for timing shifts, spending rose by 6% or $90 billion.
Analysis of Notable Trends in This Fiscal Year to Date: Through the first four months of FY2020, revenue from corporate income taxes rose by 27% . Additionally, Federal Reserve remittances increased by 14% partly due to lower short-term interest rates that reduced its interest expenses. On the spending side, after accounting for timing shifts, total Social Security, Medicare, and Medicaid outlays rose by 6% . Outlays for the Department of Defense rose by 7% , largely for procurement and research and development.
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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When Was The Last Time The United States Was Out Of Debt
On , president Andrew Jackson paid off the entire national debt, the only time in U.S. history that has been accomplished. However, this and other factors, such as the government giving surplus money to state banks, soon led to the Panic of 1837, in which the government had to resume borrowing money.
How To Look At The National Debt By Year
It’s best to look at a country’s national debt in context. During a recession, expansionary fiscal policy, such as spending and tax cuts, is often used to spur the economy back to health. If it boosts growth enough, it can reduce the debt. A growing economy produces more tax revenues to pay back the debt.
The theory of supply-side economics says the growth from tax cuts is enough to replace the tax revenue lost if the tax rate is above 50% of income. When tax rates are lower, the cuts worsen the national debt without boosting growth enough to replace lost revenue.
Major events, like wars and pandemics, can increase the national debt.
During national threats, the U.S. increases military spending. For example, the U.S. debt grew after the September 11, 2001, attacks as the country increased military spending to launch the War on Terror. Between fiscal years 2001 and 2020, those efforts cost $6.4 trillion, including increases to the Department of Defense and the Veterans Administration.
The national debt by year should be compared to the size of the economy as measured by the gross domestic product. That gives you the debt-to-GDP ratio. That ratio is important because investors worry about default when the debt-to-GDP ratio is greater than 77%that’s the tipping point.
You can also use the debt-to-GDP ratio to compare the national debt to other countries. It gives you an idea of how likely the country is to pay back its debt.
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Tracking The Federal Deficit: June 2020
The Congressional Budget Office reported that the federal government ran a deficit of $864 billion in June, the ninth month of fiscal year 2020. This monthly deficit is more than 100 times larger than last Junes deficit of $8 billion. This difference came from a sizable drop in revenues, which were down 28% from last June , and especially from a massive increase in outlays, up 223% from last June . The budget deficit so far this fiscal year has surged to $2.7 trillion, $2 trillion more than at the same point last year. As exemplified by June, the cumulative difference stems from a drop in revenues13% lower than at the same point last yearand a much bigger leap in outlays49% higher than at this time last year.
The drop in revenue between last June and this one was due almost entirely to the administration delaying the deadline for quarterly tax payments from June 15 to July 15. Monthly revenue was down $93 billion compared to a year ago, of which $43 billion came from delaying corporate tax payments while $42 billion came from delaying individual and payroll tax payments. CBO expects most of this delayed revenue to eventually be collected, although some will be lost as businesses fail before the new payment deadlines.
Is The National Debt A Problem
Economists and lawmakers frequently debate how much national debt is appropriate. Most agree that some level of debt is necessary to stimulate economic growth and that there is a point at which the debt can become a problem, but they disagree about where that point is. If the debt does get too big, it can result in cuts to government programs, tax hikes, and economic turmoil.