Dynamics and Challenges of U.S. Public Debt

The U.S. national debt consists of Treasury securities held by public investors and intragovernmental accounts. Debt rises in years of budget deficits, when the government has to borrow, and declines in years of surpluses due to revenue surpluses. Its ratio to GDP rises during wars and recessions, but can fall due to economic growth, inflation, or government surpluses.

Total debt exceeded 35 trillion dollars at the end of 2024, with a projected increase to 172% of GDP by 2054. This is because spending on mandatory programs and interest on debt is outpacing income growth. An aging population and rising health care costs raise long-term concerns about the sustainability of U.S. fiscal policy.

The COVID-19 pandemic has significantly increased the national debt, with the 2020 budget deficit totaling 3.3 trillion dollars, becoming the largest since 1945. Foreign investors held about 7.7 trillion dollars of U.S. debt in 2021, underscoring the global importance of U.S. debt. The borrowing limit set by the national debt ceiling has been raised repeatedly to prevent defaults.

National debt is divided into marketable and non-marketable securities. The former include Treasury bonds and bills actively traded on the market, while the latter are linked to funds such as Social Security. The debt-to-GDP ratio remains a key indicator of the government's fiscal health. It has risen from 34.7% of GDP in 2000 to over 100% in recent years. While economic growth and inflation may temporarily lower the ratio, the debt burden has continued to increase since the 1980s due to tax changes, military spending, and financial crises.

Historically, debt has increased during recessions, as was the case after the 2008 crisis when large bailout packages, including the Recovery Act, significantly increased borrowing. Similarly, debt has been rising in recent years due to pandemic measures to support the economy and tax policy changes, such as the 2017 corporate tax cuts. Overall, rising debt emphasizes the need to balance government spending and revenues.

Debt Holders

As of October 2018, foreign companies held 6.2 trillion dollars in U.S. debt, representing 39% of total government-owned debt ($16.1 trillion) and 28% of total debt (21.8 trillion dollars). By December 2020, foreign ownership had fallen to 33% (7 trillion dollars of 21.6 trillion dollars), with 4.1 trillion dollars(59.2%) held by foreign governments and 2.8 trillion dollars (40.8%) held by private investors. The largest national holders were Japan (1.2 trillion dollars or 17.7%), China ($1.1 trillion or 15.2%), and the United Kingdom (0.4 trillion dollars or 6.2%).

Historically, foreign governments' share of U.S. debt rose from 13% in 1988 to 34% in 2015, but has since declined. China's share, which peaked at 1.3 trillion dollars (9.1% of U.S. debt) in 2011, has fallen to 5% in 2018, and Japan's share has fallen from 1.2 trillion dollars (7%) in 2012 to 4% by 2018.

Despite significant debt, the U.S. earns more on its assets abroad than it pays out to foreign investors. However, the net international investment position still reflects a 9 trillion dollars deficit.

Projections

The Congressional Budget Office (CBO) assessed the impact of the Tax Cuts and Jobs Act and related spending legislation, predicting a significant increase in the U.S. budget deficit and public debt between 2018 and 2028. For fiscal year 2018, the deficit is projected at 804 billion dollars, a 21% increase from 2017 and 39% higher than the previous baseline projection prepared under President Obama. 

The cumulative deficit for 2018-2027 is projected at 11.7 trillion dollars, 1.6 trillion dollars higher than the previous projection. This increase is driven by 1.7 trillion dollars in revenue losses due to tax cuts and 1 trillion dollars in additional spending, partially offset by 1.1 trillion dollars in additional revenue associated with higher economic growth.

CBO expects the national debt to grow significantly, from 78 of GDP (16 trillion dollars) in 2018 to 96% of GDP (29 trillion dollars) by 2028, the highest level since World War II. Under an alternative scenario in which some policies, such as extending individual tax breaks beyond 2025, are maintained, the aggregate deficit could increase by 13.7 trillion dollars between 2018 and 2027. At the household level, this increase in debt would range from 12,700 dollars to 28,500 dollars per household, depending on the scenario.

In 2020, amid the COVID-19 pandemic, the deficit is projected to reach 3.3 trillion dollars, or 16% of GDP, more than triple that of 2019 and the largest since 1945. Public debt is also expected to rise sharply, from 79% of GDP in 2019 to 98% in 2020.

Impact on economic growth

A study by economists Kenneth Rogoff and Carmen Reinhart (2010) found that high levels of public debt (over 90% of GDP) can reduce economic growth by up to 1.6% per year, compared to 3-4% for moderate or low debt. However, in 2013, researchers at the University of Massachusetts discovered errors in the calculations and methodology of the original study, saying there was no link between high debt and slower growth. Reinhart and Rogoff, despite the adjustments, argued that the negative correlation persists, although other economists such as Paul Krugman have argued that low growth leads to higher debt, not the other way around.

Former Federal Reserve Chairman Ben Bernanke emphasized in 2010 that there is no clear evidence yet of debt levels that threaten economic stability, but rising debt requires action to reduce deficits to sustainable levels.

Conclusion

U.S. public debt continues to rise, emphasizing the need for balanced economic policy. Current challenges require a strategic approach to tax and budget reform to avoid negative consequences for the economy. It is important to take into account the lessons of the past and build a long-term fiscal strategy focused on sustainable development.