The gross debt includes money that the government owes itself, so most policymakers rely on the total debt held by the public in assessing the government’s finances. This lower figure — $26.9 trillion — is roughly equal in size to the U.S. gross domestic product.
Last June, the Congressional Budget Office estimated in its 30-year outlook that publicly held debt will be equal to a record 181% of American economic activity by 2053.
What is impact to the economy?
The national debt does not appear to be a weight on the U.S. economy right now, as investors are willing to lend the federal government money. This lending allows the government to keep spending on programs without having to raise taxes.
But the debt’s path in the decades to come might put at risk national security and major programs, including Social Security and Medicare, which have become the most prominent drivers of forecasted government spending over the next few decades. Government dysfunction, such as another debt limit showdown, could also be a financial risk if investors worry about lawmakers’ willingness to repay the U.S. debt.
Foreign buyers of U.S. debt — like China, Japan, South Korea and European nations — have already cut down on their holdings of Treasury notes.
A Peterson Foundation analysis states that foreign holdings of U.S. debt peaked at 49 percent in 2011, but dropped to 30 percent by the end of 2022.
“Looking ahead, debt will continue to skyrocket as the Treasury expects to borrow nearly $1 trillion more by the end of March,” said Peterson Foundation CEO Michael Peterson. “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.
How could it affect you?
The debt equates to about $100,000 per person in the U.S. That sounds like a lot, but the sum so far has not appeared to threaten U.S. economic growth.
Instead, the risk is long term if the debt keeps rising to uncharted levels. Sohn said a higher debt load could put upward pressure on inflation and cause interest rates to remain elevated, which could also increase the cost of repaying the national debt.
And as the debt challenge evolves over time, choices may become more severe as the costs of Social Security, Medicare and Medicaid increasingly outstrip tax revenues.
When it could turn into a more dire situation, is anyone’s guess, says Shai Akabas, director of economic policy at the Bipartisan Policy Center, “but if and when that happens, it could mean very significant consequences that occur very quickly.”
“It could mean spikes in interest rates, it could mean a recession that leads to lots more unemployment. It could lead to another bout of inflation or weird going on with consumer prices —several of which are things that we’ve experienced just in the past few years,” he said.
What do Democrats, Republicans say?
Both Democrats and Republicans have called for debt reduction, but they disagree on the appropriate means of doing so.
The Biden administration has been pushing for tax hikes on the wealthy and corporations to reduce budget deficits, in addition to funding its domestic agenda. Biden also increased the budget for the IRS, so that it can collect unpaid taxes and possibly reduce the debt by hundreds of billions of dollars over 10 years.
Republican lawmakers have called for large cuts to non-defense government programs and the repeal of clean energy tax credits and spending passed in the Inflation Reduction Act. But Republicans also want to trim Biden’s IRS funding and cut taxes further, both of which could cause the debt to worsen.
Both claims are previews of cases that will likely be put to voters in this year’s presidential election.
White House spokesman Michael Kikukawa put the blame on the GOP, saying in a statement that the steady accrual over years was “trickle-down debt — driven overwhelmingly by repeated Republican giveaways skewed to big corporations and the wealthy.”
By contrast, Republican lawmakers have said that borrowing during the Biden administration contributed to the 2022 spike in inflation rates that dragged down the Democratic president’s approval ratings.
Akabas said, “There is growing concern among investors and rating agencies that the trajectory we’re on is unsustainable — when that turns into a more dire situation is anyone’s guess.”
Source: Marketwatch.com
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