Why is US debt-to-GDP so high?
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.
One of the main culprits is consistently overspending. When the federal government spends more than its budget, it creates a deficit. In the fiscal year of 2023, it spent about $381 billion more than it collected in revenues. To pay that deficit, the government borrows money.
History of U.S. Debt
GDP shrinks during a recession while government tax receipts decline and safety net spending rises. The combination of higher budget deficits with lower GDP inflates the debt-to-GDP ratio.
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. It also increases expectations of higher rates of inflation and erosion of confidence in the U.S. dollar.
The target most commonly referenced is a 60% debt-to-GDP ratio. Despite the uncertainties surrounding the debt, there are a few things of which we can be sure: The rising debt reflects an imbalance between tax and spending policies.
"Governments, then, must service their debts – pay interest and repay principal when bonds come due – but they don't necessarily have to pay them off; they can issue new bonds to pay principal on old bonds and even borrow to pay interest as long as overall debt doesn't rise too much faster than revenue," he added.
Every year since 2001, the U.S. government has spent more money than it takes in, which means it has to borrow money to make up for the difference. “Debt has many useful purposes,” said Kris Mitchener, professor of economics at the Leavey School of Business at Santa Clara University.
Under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation).
Most include a combination of deep spending cuts and tax increases to bend the debt curve. Cutting spending. Most comprehensive proposals to rein in the debt include major cuts to spending on entitlement programs and defense.
| Country/territory | US foreign-owned debt (January 2023) |
|---|---|
| United Kingdom | $668,300,000,000 |
| Belgium | $331,100,000,000 |
| Luxembourg | $318,200,000,000 |
| Switzerland | $290,500,000,000 |
What is the #1 cause of debt in the US?
The largest percentages of the average consumer debt balance are mortgages.
- Japan. Japan has the highest percentage of national debt in the world at 259.43% of its annual GDP. ...
- United States. ...
- China. ...
- Russia.
Low Interest Rates: Japan has maintained a low interest rate environment for an extended period, partly due to the Bank of Japan's monetary policies. This means that the cost of servicing the debt is re.
The US Department of Treasury building seen in March 2023. US government debt is nearing $35 trillion. The high and rising level of US government debt risks driving up borrowing costs around the world and undermining global financial stability, the International Monetary Fund has warned.
| Characteristic | National debt in relation to GDP |
|---|---|
| Macao SAR | 0% |
| Brunei Darussalam | 2.06% |
| Kuwait | 3.08% |
| Hong Kong SAR | 4.27% |
The macro leverage ratio, which measures total outstanding nonfinancial debt as a share of nominal gross domestic product, rose to 287.8% in 2023, 13.5 percentage points higher than a year ago, according to a report by the National Institution for Finance and Development (NIFD).
By January of 1835, for the first and only time, all of the government's interest-bearing debt was paid off. Congress distributed the surplus to the states (many of which were heavily in debt). The Jackson administration ended with the country almost completely out of debt!
The least indebted state is Oklahoma, according to the report, followed by Iowa and a tie for third with New Hampshire and Nebraska. The fifth best state in the category is Ohio. The next five best states, from best to worst, are Wyoming, Indiana, and Wisconsin, with Vermont and South Dakota tied in their ranking.
1 Foreign governments hold a large portion of the public debt, while the rest is owned by U.S. banks and investors, the Federal Reserve, state and local governments, mutual funds, pensions funds, insurance companies, and holders of savings bonds.
Tax cuts, stimulus programs, government spending and lower tax revenue also contributed to the debt load. The $34 trillion figure looms large, but experts say it's important to put the number in context.
Do any countries owe money to the US?
How about Ireland, the Cayman Islands, and Brazil? Did you expect them to be substantial holders of U.S. debt? Then there are the countries that owe America money. Even though Japan holds the biggest amount of U.S. debt, the U.S. is also owed a lot of money by them too.
China owes the United States $1.3 trillion, which is the most debt out of all the countries that are its debtors. Japan was the primary debt holder until 2008, but now comes in second place, with $1.2 trillion. Other countries with outstanding U.S. debt include Russia, India and South Korea.
China is one of the United States's largest creditors, owning about $859.4 billion in U.S. debt. 1 However, it does not own the most U.S. debt of any foreign country.
People buy government because they assume a government bond is a safe investment. However, this assumes that inflation will remain low. If governments print money to pay off the national debt, inflation could rise. This increase in inflation would reduce the value of bonds.
Nearly half of mandatory spending in 2022 was for Social Security and other income support programs such as the Child Tax Credit, food and nutrition assistance, and federal employee benefits (figure 3). Most of the remainder paid for the two major government health programs, Medicare and Medicaid.
