The federal government’s gross national debt has reached a record-breaking $34 trillion, signaling potential political and economic challenges on the horizon as America grapples with improving its balance sheet. The U.S. Treasury Department recently released a report highlighting the nation’s finances, which have become a source of tension in the divided halls of Washington. Without an annual budget in place, there is a looming possibility of parts of the government shutting down.
To avert what would be a historic default, Republican lawmakers and the White House agreed last June to temporarily raise the nation’s debt limit, providing some relief until January 2025. However, the national debt has exceeded $34 trillion much earlier than projected prior to the pandemic. According to the Congressional Budget Office’s January 2020 forecast, gross federal debt was expected to surpass $34 trillion in fiscal year 2029.
The accelerated growth of debt can be attributed to the multi-year pandemic that began in 2020, causing a significant economic downturn. In response, both former President Donald Trump and current President Joe Biden heavily borrowed to stabilize and support the economy. Nevertheless, the rebound was accompanied by soaring inflation, leading to increased interest rates and higher costs for servicing the government’s debts.
Economics professor Sung Won Sohn from Loyola Marymount University expressed concerns about Washington’s spending habits, stating, So far, Washington has been spending money as if we had unlimited resources. But the bottom line is there is no free lunch. Sohn’s outlook for the future is grim, suggesting that significant challenges lie ahead for the country.
While the gross debt includes money owed by the government to itself, policymakers primarily focus on the total debt held by the public, which stands at approximately $26.9 trillion. This figure is roughly equivalent to the size of the United States’ gross domestic product.
According to the Congressional Budget Office’s 30-year outlook in June, publicly held debt is projected to reach a record 181% of American economic activity by 2053.
Currently, the national debt does not appear to be impeding U.S. economic growth, as investors are willing to lend money to the federal government. This allows the government to continue funding programs without raising taxes. However, the long-term trajectory of debt accumulation raises concerns about national security, as well as the integrity of major programs like Social Security and Medicare. These programs are predicted to be the primary drivers of government spending in the coming decades. Additionally, government dysfunction, especially regarding the debt limit, poses a financial risk if investors become worried about the government’s willingness to repay its debt.
Foreign buyers of U.S. debt, such as China, Japan, South Korea, and European nations, have notably reduced their holdings of Treasury notes. Analysis from the Peterson Foundation reveals that foreign holdings of U.S. debt peaked at 49% in 2011 but declined to 30% by the end of 2022.
Michael Peterson, the CEO of the Peterson Foundation, emphasized the concerning trend, stating, Looking ahead, debt will continue to skyrocket as the Treasury expects to borrow nearly $1 trillion more by the end of March. Adding trillion after trillion in debt year after year should be a flashing red warning sign to any policymaker who cares about the future of our country.
With a debt equating to approximately $100,000 per person in the United States, immediate threats to U.S. economic growth have yet to materialize. However, the real risk lies in the long term, as a continuously rising national debt could lead to inflationary pressures and elevated interest rates, consequently driving up the cost of repaying the debt.
As time progresses, the debt challenge could become more severe as the costs of programs like Social Security, Medicare, and Medicaid outpace tax revenues. While the exact timeframe for this potential crisis remains uncertain, Shai Akabas, Director of Economic Policy at the Bipartisan Policy Center, warns, if and when that happens, it could mean very significant consequences that occur very quickly.
In order to address both current concerns and future risks, policymakers will need to navigate the complex task of balancing economic growth, fiscal responsibility, and the sustainability of vital programs. Tackling the mammoth debt burden will require bipartisan efforts and a comprehensive plan to ensure the financial stability and prosperity of the nation.
