Fiscal Policy Research

Explanation of source links: Throughout the research below, you will find links of three types. The first and most frequent type is to primary sources such as governmental agencies. The second is to nonprofit groups that generally use government data or their own research to support their philanthropic mission. We have tried to use the least biased of these, or when in doubt, we have identified their bias. The third is to articles in periodicals or newspapers that we find to be of interest. These are not meant to be construed as original sources, and in some cases may not be accessible, depending on a reader's frequency of prior visits to the linked periodical or newspaper.

Important Caveat: Given the recency of the $2 trillion CARES Act, the data used in this research have not yet been updated.

How much is the total federal government debt today?

The US government has two measures of its debt. The first is referred to as net debt, also often referred to as “Debt Held by the Public.” This amount excludes obligations to other government agencies such as the Social Security Administration. There is approximately $16.8 trillion of such debt outstanding today. The second amount is gross debt, which is the amount the federal government owes including its obligations to other agencies. Today, this amount exceeds $23 trillion.

What are the components of the Federal Budget?  

Federal budget spending is often divided between “mandatory spending” and “discretionary spending.” Mandatory spending includes the spending that is mandated by law, meaning programs such as Social Security, Medicare, Medicaid, retirement benefits for veterans and federal employees, etc. Discretionary spending is the spending that Congress and the executive can modify and control each year. The following charts provided by the Peter G. Peterson Foundation show the outlines of each.

How are these two components of the Federal Budget growing?

According to the CBO, mandatory spending has grown and is projected to grow, while discretionary spending has declined and is projected to continue to decline:

WHAT ARE SOME OF THE IMPLICATIONS OF THESE RATES OF GROWTH? 

 According to the Peter G. Peterson Foundation, the growth of mandatory programs will squeeze discretionary spending as follows:

What are the components of Federal Tax revenue today?

Over the next decade, individual income taxes as a share of GDP are projected by the CBO to rise following the expiration at the end of 2025 of certain temporary tax provisions.

How rapidly is the total federal debt accumulating?

Based on current spending in excess of tax revenue, the federal government will borrow between $1.1 and $1.2 trillion every year for the foreseeable future. The CBO estimates that federal net debt will reach $29 trillion by 2030 while gross debt will reach $36.2 trillion.  

Who owns the federal debt?

US citizens (as individuals via mutual funds, insurance companies, and the government itself) own $16.3 trillion. The balance of $6.7 trillion is held by foreign countries: Japan holds the most at $1.16 trillion, followed by China at 1.09 trillion, then the UK, Brazil, Ireland and Luxembourg. 

Of government holders, the Social Security Trust Fund (SSTF) is the largest holder at $2.8 trillion. This is the result of the fact that the SSTF has run surpluses throughout its history and has invested those surpluses in government securities. This pattern is expected to reverse in 2020. 

The second largest holder of US federal debt is the Federal Reserve at $2.4 trillion. Most of these securities were accumulated during the 2008 financial crisis and the Fed has announced its intention to liquidate these investments as the individual bonds mature.  

What is the current interest expense on the federal debt? 

In budgeting for interest expense, the federal government uses interest on net debt, thereby excluding interest paid to governmental agencies. Although this effectively understates the true cost of its debt, the impact of this will not be significant until the SSTF depletes its surplus and the federal government is required to externally refinance their obligations. (See below.) CBO estimates, therefore, are also based on the net debt amount. Interest expense is projected to increase to $382 billion for 2020, from $376 billion in 2019.

How do you measure whether a country can support its debt?

Analysts typically look at several measures of debt service ability, including debt to GDP, interest expense to GDP, and interest expense to total government spending. 

Based on these measures, what is the history of federal debt?

The following chart provided by the Pew Research Center shows the increase in total debt as a percentage of GDP through 2018.

Despite this growing level of debt, due to declining interest rates over the past 20 years, interest expense as a percentage of GDP has remained relatively constant. Based on estimates of the CBO, however, that trend is expected to change in the foreseeable future.

What is the total of state and local debt?

State and local debt was approximately $3.0 trillion at the end of 2017. Unlike federal government debt, state and local debt has remained stable as a percentage of GDP for several years.  

How does state and local debt affect the foregoing measures?

State and local debt adds about 9% to the total level of public debt. It is generally not included in the traditional measures of national debt size such as debt-to-GDP ratio. As a result, such analysis understates the true debt burden of our country. 

Based on projected increases in the national debt, how will interest expense increase?

Based on the CBO estimates, interest rates will increase from an average of 2.1% in 2019 to 3.0% in 2025. Based on this projection, total interest expense on the federal debt will reach $819 billion by 2030, constituting 11% of the federal budget, as follows:

But this only tells part of the story. As noted above, Social Security cash flows after interest income are projected to become negative by 2020. The entire $2.8 trillion Social Security reserve is projected to be exhausted by 2034. The Committee for a Responsible Federal Budget projects that thereafter Social Security will run an annual cash flow deficit of $250 to $400 billion. This means that the federal government deficit will increase in those years by the same amount unless Social Security benefits are reduced or taxes are increased.

If interest rates increase, what could happen to the level of interest expense?

Based on current CBO interest rates, interest expense as currently projected will reduce the discretion of future generations to invest in areas of greater need. If rates rise, however, the result could be catastrophic. For example, if interest rates double from current levels, total interest expense in 2028 will reach $1.8 trillion or 26% of the federal budget.

What does the federal government say about this level of debt?

In their January 2020 report on the Budget and Economic Outlook: 2020 to 2030, the CBO includes a section entitled “Consequences of Growing Debt.” Here is what they say in its entirety:

Debt Held by the Public: “In CBO’s baseline, after accounting for all of the government’s borrowing needs, debt held by the public rises from $17.9 trillion at the end of 2020 to $31.4 trillion at the end of 2030 (see Table 1-2). As a percentage of GDP, that debt would increase from 81 percent at the end of 2020 to 98 percent by the end of the projection period. At that point, such debt would be the largest since 1946 and more than twice the average over the past 50 years.”            

Consequences of Growing Debt: “If federal debt as a percentage of GDP continued to rise at the pace that CBO projects it would under current law, the economy would be affected in two significant ways:                                          

• That growing debt would dampen economic output over time, and 

• Rising interest costs associated with that debt would increase interest payments to foreign debt holders and thus reduce the income of U.S. households by increasing 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 significant—such as expectations of higher inflation or an increased burden of financing public and private activity—would also have a greater chance of occurring. Those effects would worsen the consequences associated with high and rising federal debt. To put debt on a sustainable path, lawmakers will have to make significant changes to tax and spending policies—increasing revenues more than they would under current law, reducing spending below projected amounts, or adopting some combination of those approaches.”

How do these Gross debt levels compare to other developed countries?

How does our annual deficit relative to GDP compare to the same countries?

Third world countries have a history of failure, but do developed countries like the US really fail?  

Yes; in fact, several countries, including Spain, Greece, Ireland, and Cyprus, all failed or required assistance during the recent financial crisis. Italy continues to struggle with unsustainable debt levels. Here is a brief history of Spain and Greece:  

Not unlike the US, Spain experienced a prolonged increase in housing prices during the 1990s and in the early 2000s (now often referred to as a housing bubble). Both banks and consumers were highly leveraged and exposed to the risk of a decline in prices. When the financial crisis hit, Spain experienced a significant decline in real estate prices, the beginning of a prolonged economic recession, and the failure of much of its banking sector. Although Spain’s public debt at the time was a seemingly manageable 36.2% of its GDP, its capacity to borrow was not sufficient to provide the bailout to the financial sector that was required. In 2012, the EU began providing up to €100 billion in loans both directly to Spanish banks and to the government.    

Greece entered the Great Recession with deficits estimated to have been between 6% to 15% of GDP and total debt between 113% to 130% of GDP. These numbers are estimates because Eurostat discovered the Greek government reported inaccurate numbers. As the country slid into recession, tax revenues declined and deficits and total debt increased dramatically. Greece, like Spain, was unable to provide the support necessary to its financial institutions. The country was also unable to finance its own deficit spending. Since 2011, Greece has been in a perpetual state of crisis, requiring several bailouts from the European Community, as well as several restructures and debt forgiveness. 

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