5 Ways Governments Reduce National Debt (2024)

While reducing debt and stimulating the economy are common goals of most governments in developed economies, achieving those objectives often involves tactics that appear to be mutually exclusive and sometimes contradictory. Given the myriad of fiscal and monetary policies, individuals and economists commonly debate strategies to reduce the national debt.

Key Takeaways

  • Tax hikes alone are rarely enough to stimulate the economy and pay down debt.
  • Governments often issue debt in the form of bonds to raise money.
  • Spending cuts and tax hikes combined have helped lower the deficit.
  • Bailouts and debt defaults have disadvantages but can help a government solve a debt problem.

Ways That Governments Reduce Federal Debt

1. Bonds

Using Debt to Pay Debt

Governments issue bonds to borrow money to avoid raising taxes. This helps pay expenditures and stimulate the economy through public spending. The government must pay interest to its creditors with debt issues.

Theoretically, spending can generate additional tax income from businesses and taxpayers, which can be used to pay down debt. Issuing debt may provide a boost to economic growth but may not be effective in reducing long-term government debt directly.

$33 Trillion

The U.S. national debt in September 2023.

Buying Back Bonds

When the economy struggles, as during periods of high unemployment, governments seek to stimulate the economy by buying bonds they have issued. The U.S. Federal Reserve implemented quantitative easing, buying government bonds and other financial securities to spur economic growth and aid recovery from the financial crisis of 2007-2008.Many financial experts favor a quantitative-easing tactic in the short term. However, buying debt has not proved more effective than borrowing one's way to prosperity by issuing bonds.

2. Interest Rates

Maintaining interest rates at low levels can help stimulate the economy, generate tax revenue, and, ultimately, reduce the national debt. Lower interest rates make it easier for individuals and businesses to borrow money for goods and services, which creates jobs and increases tax revenues. Low interest rates have been used as a strategy of the United States, the European Union (EU), the United Kingdom, and other nations during times of economic stress.

3. Spending Cuts

From 1921 to 1974, the President led the government budgeting process. In 1974, President Nixon signed the Budget and Impoundment Control Act of 1974 so that Congress could reclaim power over spending. Each year, the Congressional Budget Office (CBO) publishes the long-term projections of the federal budget and the future economy based on a current snapshot.

Citizens often waver in opinions about the need to balance the budget or cut government spending. These cuts often culminate in reductions in benefits to low-income families, veterans programs, and environmental protection programs.

4. Raising Taxes

Governments can raise taxes to pay for expenditures and to pay down their debt. Taxes can include federal, state, and in some cases, local income and business tax. Other tax examples include the alternative minimum tax, "sin" taxes on alcohol and tobacco products, corporate tax, estate tax, Federal Insurance Contributions Act (FICA), and property taxes.

Although tax hikes are common practice, most nations face sizable and growing debts. When cash flows increase but spending continues to rise, increased revenues have little impact on a nation's overall debt level.

5. Bailout or Default

Many nations in Africa have been the beneficiaries of debt forgiveness. In the late 1980s, Ghana's debt burden was significantly reduced by debt forgiveness. To avoid default in 2010, Greece was given the equivalent of $146 billion in bailout funds by the International Monetary Fund and the European Union.

Default can include bankruptcy and/or restructuring payments to creditors, which is a common and often successful strategy for debt reduction.

Why Has the U.S. National Debt Grown?

While the U.S. national debt can increase and wane, economic strains such as the COVID-19 pandemic, the wars in Iraq and Afghanistan, and the Great Recession of 2008 have been contributors.

Who Owns the U.S. National Debt?

Public debt creditors include individual investors, institutions, and various foreign governments.

How Much Would Taxpayers Need To Provide To Pay Off U.S. Debt?

As of Sept. 21, 2023, the amount attributable to each U.S. taxpayer is $98,460.

The Bottom Line

Governments use various strategies to reduce their national debts. From issuing debt in the form of bonds to lowering interest rates, such actions may have short-lived success but always encounter debate.

5 Ways Governments Reduce National Debt (2024)


5 Ways Governments Reduce National Debt? ›

The PWBM's three policy bundles to stabilize debt and grow the economy are along three themes: (1) raising taxes on high-income households, (2) broad-based changes to Social Security and Medicare, and (3) a mixture of broad-based new tax revenue and discretionary spending cuts.

How governments reduce the national debt? ›

The PWBM's three policy bundles to stabilize debt and grow the economy are along three themes: (1) raising taxes on high-income households, (2) broad-based changes to Social Security and Medicare, and (3) a mixture of broad-based new tax revenue and discretionary spending cuts.

How are national debt and deficit related 5 points? ›

The national debt is the sum of a nation's annual budget deficits, offset by any surpluses. A deficit occurs when the government spends more than it raises in revenue. The government borrows money by selling debt obligations to investors to finance its budget deficit.

What are the 3 major factors causing the national debt to grow? ›

Tax cuts, stimulus programs, increased government spending, and decreased tax revenue caused by widespread unemployment generally account for sharp rises in the national debt. Comparing a country's debt to its gross domestic product (GDP) reveals the country's ability to pay down its debt.

Why should we reduce the national debt? ›

A nation saddled with debt will have less to invest in its own future. Rising debt means fewer economic opportunities for Americans. Rising debt reduces business investment and slows economic growth.

How does inflation reduce government debt? ›

For a given nominal government debt stock, the government of a faster-growing and higher-inflation economy is therefore in a better position to raise the revenues needed to honor obligations: It has a larger “debt-carrying capacity.” This is captured in a falling government debt-to-GDP ratio when growth and inflation ...

Why is U.S. debt so high? ›

It began rising at a fast rate in the 1980's and was accelerated through events like the Iraq Wars and the 2008 Great Recession. Most recently, the debt made another big jump thanks to the pandemic with the federal government spending significantly more than it took in to keep the country running.

What makes national debt worse? ›

History shows the debt-to-GDP ratio tends to rise during recessions and in their aftermath. GDP shrinks during a recession while government tax receipts decline and safety net spending rises.

Who owns American debt? ›

There are two kinds of national debt: intragovernmental and public. Intragovernmental is debt held by the Federal Reserve and Social Security and other government agencies. Public debt is held by the public: individual investors, institutions, foreign governments.

Who owes the US money? ›

In total, other territories hold about $7.4 trillion in U.S. debt. Japan owns the most at $1.1 trillion, followed by China, with $859 billion, and the United Kingdom at $668 billion. In isolation, this $7.4 trillion amount is a lot, said Scott Morris, a senior fellow at the Center for Global Development.

What happens when country has too much debt? ›

If a country's debt crisis is severe enough, it could result in a sharp economic slowdown at home that impedes economic growth elsewhere in the world. Rising costs of food and other goods and services due to inflation as a government prints money to support its expenditures.

How can the government reduce its debt-to-GDP ratio? ›

Essentially, the debt-to-GDP ratio can be reduced in three ways: Fiscal austerity (i.e., spending cuts, tax increases or both) Negative real return on bonds (i.e., a nominal interest rate that is less than the inflation rate) Economic growth (i.e., GDP growing faster than debt)

Who does the government owe the national debt to? ›

Many people believe that much of the U.S. national debt is owed to foreign countries like China and Japan, but the truth is that most of it is owed to Social Security and pension funds right here in the U.S. This means that U.S. citizens own most of the national debt.

What would happen if the US paid off its debt? ›

Answer and Explanation:

If the U.S. was to pay off their debt ultimately, there is not much that would happen. Paying off the debt implies that the government will now focus on using the revenue collected primarily from taxes to fund its activities.

What happens to national debt when government spending increases? ›

Large annual budget deficits drive debt growth, as the government borrows to finance spending that exceeds revenues. For example, the federal budget deficit in FY 2023 was $1.7 trillion. This deficit is due to a $1 trillion gap between the revenue that the government collected and what it spent on government programs.

Top Articles
Latest Posts
Article information

Author: Ms. Lucile Johns

Last Updated:

Views: 6467

Rating: 4 / 5 (61 voted)

Reviews: 92% of readers found this page helpful

Author information

Name: Ms. Lucile Johns

Birthday: 1999-11-16

Address: Suite 237 56046 Walsh Coves, West Enid, VT 46557

Phone: +59115435987187

Job: Education Supervisor

Hobby: Genealogy, Stone skipping, Skydiving, Nordic skating, Couponing, Coloring, Gardening

Introduction: My name is Ms. Lucile Johns, I am a successful, friendly, friendly, homely, adventurous, handsome, delightful person who loves writing and wants to share my knowledge and understanding with you.