Understanding The National Debt (2023)

The national debt, sometimes referred to as sovereign debt, is money a government owes its creditors. In the U.S., the national debt is almost unimaginably huge: more than $31 trillion and counting.

Americans tend to believe that the U.S. national debt is way too high and even poses an imminent danger to the nation’s solvency. That’s why it plays a starring role in Congressional debt ceiling crises and never-ending debates over taxes and spending.

What Is National Debt?

Debt can take many different forms, from credit card balances and car loans to home mortgages to the $10 you owe your friend for lunch. For companies and individuals, debt is usually the result of spending that exceeds income.

So how does a country build up a national debt? In much the same way as regular people and companies end up in debt. National debt accumulates when a country’s annual spending exceeds its annual revenue, although there are plenty of other factors that impact nations in very different ways than more conventional debtors.

Every country has an annual budget, which pays for defense, infrastructure, social programs and more. Taxes—plus other forms of national revenue like customs duties—are the primary source of budget funding, but they don’t always cover 100% of a nation’s annual spending.

To make up for revenue shortfalls and ensure a smooth, dependable source of budget funding, governments sell bonds, commonly referred to as treasury securities or treasuries. The national debt is the total outstanding value of all of the treasuries issued by a government.

How Much Is the U.S. National Debt?

According to the U.S. Treasury Department, the current national debt of the U.S. is $31.3 trillion. That’s a huge number, and on a per capita basis, it equates to roughly $94,000 per citizen.

Individuals, however, don’t have to worry about paying off their portion of the national debt. Instead, a percentage of the annual budget is used to service the debt.

Roughly 12% of total government spending for the year, or $48 billion, was employed in maintaining the U.S. national debt as of October 2022.

National Debt vs. Budget Deficit: What’s the Difference?

A budget deficit is when a nation’s annual budget spending is greater than its annual revenue from all sources. Meanwhile, the national debt is the total outstanding value of all treasury bonds issued by a government.

In the U.S., Congress has the responsibility of passing an annual budget for the federal government. The Treasury—which is part of the executive branch controlled by the White House—gathers taxes, collects other revenue and sells U.S. government debt, known as Treasurys.

The U.S. has a budget deficit when Congress’s annual budget costs more than the Treasury raises in taxes and other revenue. When revenue exceeds spending, it’s called a budget surplus

To fund the budget, the Treasury sells bonds on a regular schedule. It sells a wide variety of debt securities with varying terms and maturities, but in each case, they are liabilities owed by the government. Investors expect to receive regular interest payments, plus the return of their principal when the securities mature.

The total of all outstanding Treasurys is considered to be the U.S. national debt. The connection between the national debt and budget deficits is somewhat indirect since the Treasury sells bonds no matter what shape the budget takes.

The budget deficit is paid for by revenue from the sale of Treasurys. Recently, that has amounted to trillions of dollars added to the national debt each year.

Is There a Connection between National Debt and Inflation?

In the first half of 2022, the U.S. inflation rate was around 8.3%. That was up from 3.4% in the first half of 2021, and 1.2% in the first half of 2020.

With inflation increasing at such a rapid rate, many Americans worry about the relationship between inflation and the U.S. national debt. Some Americans may suspect that the national debt is exacerbating the sizable price increases they’re seeing for food, gas and other necessities.

But experts are divided on whether there is a causal relationship between the national debt and inflation.

“There’s not a lot of good evidence to suggest government spending has driven much inflation,” says Nicholas Creel, assistant professor of business law at Georgia College and State University.

Jeanette Garretty, chief economist and managing director at Robertson Stephens, believes that inflation may exacerbate the deficit, and therefore the national debt.

“High inflation leads to higher interest rates, and higher interest rates will make financing the debt more expensive for the federal government,” says Garretty.

While the jury is out on whether the national debt worsens inflation, rising prices and higher interest rates make servicing the national debt more expensive, and this could potentially lead to higher taxes down the road.

What Is the Debt-to-GDP Ratio?

Gross domestic product (GDP) is the value of all the goods and services produced in one country in a given year. U.S. GDP for 2022 is currently estimated to be $25.7 trillion. The debt-to-GDP ratio tells you the size of a country’s national debt relative to annual GDP.

It’s a percentage that is calculated by dividing the total value of a country’s national debt by the total value of the country’s GDP for one year.

Debt-to-GDP ratio = Total national debt / GDP

The U.S. national debt is $31.3 trillion, and the current 2022 U.S. GDP is $25.7 trillion. Divide the former by the latter to arrive at a U.S. debt-to-GDP ratio of 121%.

This might look bad, but it’s hardly the largest global debt-to-GDP ratio. Japan currently has the largest debt-to-GDP ratio of more than 260%.

“The U.S. has a huge economy, with a lot of capability to pay taxes. Servicing the debt is not a problem,” Garretty says.

What Is the Debt Ceiling?

A uniquely American phenomenon, the debt ceiling is an arbitrary limit on the total amount of U.S. national debt. Congress controls the debt ceiling and periodically increases the limit. Another way to define the debt ceiling is a cap on the amount of debt securities that the Treasury is authorized to sell to investors.

U.S. politicians frequently delay legislation designed to raise the debt ceiling to apply pressure on their opponents. The resulting uncertainty and news about possible government shutdowns disrupt markets and may be gradually eroding global confidence in U.S. Treasurys.

The current debt ceiling was set at $28.4 trillion on Aug. 1, 2021, a number that was hit exactly one year later and has since been exceeded. This means that Congress must soon raise the debt ceiling, or risk a U.S. default on the national debt.

Congress has never not raised the debt ceiling when necessary, as failing to increase the limit would mean sovereign default by the U.S. This would instantly trigger a global financial crisis, given the central role U.S. government debt plays in the world economy.

“Congress approves all spending and all taxes,” says Howard Yaruss, author of “Understandable Economics” and a professor at New York University. “They know what the deficit is, they’ve already approved it all. So the thought that they could just decide we’re not going to pay the debt we’ve incurred is ridiculous.”

Usually, when something like this happens, Congress simply votes to raise the debt ceiling once again, making the entire procedure a performative action. Even though there have been movements to abolish the debt ceiling, it is still U.S. law and must be voted on if Congress wants to increase spending beyond it.

History of the U.S. National Debt

Until recently, the U.S. debt-to-GDP ratio hit its highest point in the years immediately following World War II. In 2020, at the height of the Covid-19 pandemic, the U.S. debt-to-GDP ratio spiked to more than 134%. It’s fallen steadily since then to settle back around 121% today.

The U.S. has not run a budget deficit every year of its existence. The most recent budget surplus the U.S. faced was in 2001. It was the fourth year in a row that the U.S. ran a budget surplus. These surpluses were eventually accounted for by tax breaks under the George W. Bush administration.

For the remainder of the 21st century, the U.S. budget deficits have added more than $100 billion per year to the national debt. In 2020 alone, as a result of spending to offset the Covid-19 global pandemic, the U.S. ran a more than $3 trillion budget deficit.