Amid the presidential election campaign, Americans appear to want more focus on an issue that neither campaign is putting front and center: the threat to Americans’ prosperity and security posed by the fact that the federal government continues spending far more than it takes in each year—and the national debt is exploding. According to polls by the Pew Research Center, a greater percentage of Americans are concerned about the rising national debt than illegal immigration, crime, public schools, and climate change, among other issues.
What is the US national debt?
The national debt is the total amount of money owed by the federal government, currently a record $35.33 trillion. That's more than the estimated 2024 GDP of the US of $28.78 trillion.
The debt grows when the government spends more than it takes in taxes during the fiscal year and sells debt in the form of Treasury bonds to fund its operations. To convince foreign governments and other big institutional investors to buy that debt, the Treasury pays interest on the bonds it issues. As of September 18, 2024, the government has spent $1.89 trillion more than it has taken in this year. When that is added to deficits from prior fiscal years, the national debt grows by an equal amount.
Why does the US have so much debt?
One of the reasons that the debt is growing is that the costs of popular government programs continue to rise. The biggest slices of the federal budget pie are the Social Security and Medicare programs that serve the growing share of the population made up of older Americans. Spending on these programs can be reduced, but both parties are reluctant to do so because they believe it would be highly unpopular with voters. Proposals to raise taxes to help fund these programs are also not politically popular.
The next largest item in the federal budget, after Social Security and Medicare, is spending on the military, another function of the federal government that neither party has shown willingness to cut significantly.
Meanwhile, another category of spending is now rivaling defense and Medicare’s share of the federal budget: the cost of spending money that the government does not have. The Congressional Budget Office forecasts that the federal government will spend $892 billion in fiscal year 2024 to pay interest on the national debt. That’s more than the amount spent on military and nearly as much as on Medicare. It’s also something that can’t be cut.
Is rising US indebtedness a bad thing?
Having a huge national debt sounds like a bad thing, but it’s not casting a shadow over most Americans’ day-to-day lives right now. In the short term, government spending is continuing to generate economic activity, ranging from the buying of groceries with Social Security payments to the construction of massive infrastructure projects, all of which deliver benefits to people and communities and buoy economic growth.
However, the US Treasury projects the debt-to-GDP ratio will continue to rise—from 123% of GDP today to 166% by 2054. As the debt keeps growing, the rising cost of paying interest on it will eventually reduce the government’s ability to spend on many programs that help generate economic activity. According to a Treasury study, rising debt will also threaten long-term economic growth by increasing the likelihood that taxes will have to go up significantly in the future. Higher taxes would likely reduce the ability of companies and consumers to generate economic growth by spending and borrowing.
Lower GDP growth would likely translate into lower corporate earnings and stock prices because stock prices are primarily driven by earnings.
Not only could rising debt lead to slower growth and more volatile markets in the long term, it also could lead to higher inflation if policymakers decide to cut interest rates to reduce the government’s cost of borrowing in hopes of avoiding tax hikes or unpopular cuts to Medicare and Social Security benefits. Lower interest rates and other expansionary monetary policies have historically helped fuel inflation. Faced with this forecast for the future, Dirk Hofschire, Fidelity’s managing director of research, says: "Debt in the world's largest economies is fast becoming the most substantial risk in investing today.”
Fidelity's Asset Allocation Research Team believes the rise in debt is ultimately unsustainable. "Historically, no country has perpetually increased its debt/GDP ratio,” says Hofschire. “The highest levels of debt topped out around 250% of GDP. Since 1900, 18 countries have hit a debt/GDP level of 100%, generally due to the need to pay for fighting world wars or extreme economic downturns such as the Great Depression. After hitting the 100% threshold, 10 countries reduced their debt, 7 increased it, and one kept its level of debt roughly the same."
Some deeply indebted smaller countries have been forced to reform their economies and lower their debt by pressure from the International Monetary Fund or market participants known as the “bond vigilantes.” But the US is unlikely to experience something similar, given its stature as the world’s largest economy and reserve currency. What may be more likely is an economic future like that of present-day Japan where high government debt has helped create a climate of ongoing economic stagnation.
To be sure, not everyone agrees on how dangerous debt is. One controversial but increasingly popular economic philosophy known as Modern Monetary Theory even holds that countries such as the US, whose currencies are not backed by assets such as gold reserves, don’t need to worry about debt. Advocates argue that the US can always increase the money supply to cover its debt service and so would never risk defaulting on its debt.
Why isn’t the national debt a campaign issue?
Members of both political parties used to express concern about the economic impact of government debt and deficit spending. In the past, Democrats and Republicans alike supported a constitutional amendment requiring a balanced budget. From 1998 to 2001, congressional Republicans and a Democrat president produced balanced federal budgets, and even a budget surplus. But since then, deficit spending that fuels the debt has gained bipartisan support even in a highly polarized political environment.
How would the presidential candidates’ proposals impact the national debt?
Together the Trump and Biden administrations added roughly $7 trillion to the national debt. So it’s not surprising that neither former President Donald Trump nor Vice President Kamala Harris have positioned themselves as the candidate of fiscal prudence. Harris talks about raising taxes on corporations and wealthy individuals to help pay for relief for middle class workers, parents, and small business. Trump talks about raising tariffs to extend or expand expiring tax cuts for individuals and corporations. But neither candidate has laid out a comprehensive plan to reduce the deficit.
What’s next for America’s national debt?
Even as the campaigns roll on, the clock is also ticking toward the expiration of the 2023 agreement, which suspended the limit on the amount of new debt the government can issue. The current suspension of the so-called debt ceiling ends on January 1, 2025. Congress and the Biden administration must reach an agreement to avoid a potential default on the government’s debt. While a default is not in the cards, the process of reaching an agreement to avoid one could be as drawn out and contentious as it has typically been in the past.
Of course, raising the debt ceiling will be better than a default, but it does not address the potential long-term impacts of ever-rising government debt. Nor does it prevent ratings agencies and investors from having their say about rising debts and worsening governance. In 2011, Congress lifted the debt ceiling, but the credit rating agency Standard & Poor's still downgraded the US credit rating to AA+, one step below the best rating of AAA. Standard & Poor's cited the growing deficit and the prolonged debate as reasons for the downgrade.
Less foreseeable is how much more the debt could potentially grow if the US were to face an economic or military crisis. While the debt grew significantly during the mostly prosperous and peaceful 1980s and most of the 1990s, the deficit spending-based policy responses to the 2008 financial crisis and COVID economic shutdowns have helped fuel especially rapid growth since that time. Because it’s the nature of wars and recessions to break out whenever they choose to do so, the possibility of a big and unexpected surge in spending is always possible.
How might government debt affect markets in the short term?
Financial markets generally react over time to changes in the pace of economic growth, and the direction of corporate earnings and asset prices, rather than to short-lived political events such as the approach of the debt ceiling. However, US stocks have historically turned volatile as the government has approached the debt ceiling and then have risen on average in the months following an agreement to raise the debt limit. That was the case even after the 2011 downgrade.
What can investors do about the rising national debt?
There will always be risks if you are an investor. So it's important to take a long-term view of your investments and review them regularly to make sure they line up with your time frame for investing, risk tolerance, and financial situation. Ideally, your investment mix is one that offers the potential to meet your goals while also letting you rest easy at night.
We suggest you—on your own or with your financial advisor—define your goals and time frame, take stock of your tolerance for risk, and choose a diversified mix of stocks, bonds, and short-term investments that you consider appropriate for your investing goals.