The federal government’s gross national debt has topped $34 trillion, a record amount that foreshadows the forthcoming political and economic hurdles in improving America’s balance sheet in the future years.
The United States Treasury Department issued a report Tuesday recording U.S. finances, which have been a subject of contention in a politically divided Washington that might result in parts of the government shutting down without an annual budget.
Last June, Republican lawmakers and the White House agreed to temporarily raise the nation’s debt ceiling, averting a historic default. This arrangement is valid until January 20, 2025. Here are some answers to frequently asked questions concerning the nation’s new record debt.
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How did the national debt get to $34 trillion?
The national debt surpassed $34 trillion several years earlier than anticipated prior to the pandemic. According to the Congressional Budget Office’s January 2020 predictions, the gross national debt will exceed $34 trillion in fiscal year 2029.
However, the debt expanded quicker than projected due to a multi-year pandemic that began in 2020 and shut down much of the US economy. Under then-President Donald Trump and current President Joe Biden, the government borrowed extensively to stabilize the economy and assist recovery. However, the recovery was accompanied by a jump in inflation, which raised interest rates and made it more expensive for the government to service its debts.
“So far, Washington has been spending money as if we had unlimited resources,” said Sung Won Sohn, a Loyola Marymount University economics professor. “But the bottom line is there is no free lunch,” he went on to say, “and I think the outlook is pretty grim.”
Because the gross debt includes money owed by the government, most policymakers base their assessment of the government’s finances on the total debt owned by the public. This lower amount, $26.9 trillion, is roughly comparable to the size of the US GDP.
In its 30-year outlook released in June, the Congressional Budget Office anticipated that publicly held debt would be equal to a record 181% of American economic activity by 2053.
How will this affect the economy?
The national debt does not appear to be a burden on the US economy at the moment, as investors are eager to lend money to the federal government. This lending allows the government to continue spending on programs without raising taxes.
However, the debt’s trajectory in the coming decades may jeopardize national security and significant programs such as Social Security and Medicare, which have emerged as the primary drivers of projected government spending over the next few decades. If investors are concerned about Congress’ willingness to repay the US debt, government instability, such as another debt ceiling battle, might pose a financial risk.
Foreign buyers of US debt, such as China, Japan, South Korea, and European countries, have already reduced their holdings of Treasury notes.
According to a Peterson Foundation estimate, foreign holdings of US debt peaked at 49 percent in 2011 but will fall 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,” Peterson Foundation CEO Michael Peterson warned. “Adding trillions of dollars in debt, year after year, should be a flashing red warning sign to any policymaker concerned about our country’s future.”
How might it affect me?
In the United States, the debt is approximately $100,000 per individual. That may appear to be a large number, but it has not appeared to pose a danger to US economic development thus far.
Instead, the risk is long-term if the debt continues to rise to unprecedented proportions. According to Sohn, a bigger debt load could put upward pressure on inflation and cause interest rates to remain high, increasing the cost of servicing the national debt.
And, as the financial crisis worsens, decisions may grow more difficult as the costs of Social Security, Medicare, and Medicaid surpass tax collections.
It’s anyone’s estimate when things may worsen, 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 higher interest rates, or it could mean a recession with a lot more unemployment.” It might lead to another round of inflation or strange things happening with consumer pricing — several of which have happened in the last few years,” he warned.
What is the difference between Republicans and Democrats?
Both Democrats and Republicans have called for debt reduction, but they disagree on how to go about it.
In addition to funding its domestic program, the Biden administration has advocated for tax increases on the wealthy and companies to minimize budget deficits. Biden also boosted the IRS budget so that it could collect unpaid taxes and potentially lower the national debt by hundreds of billions of dollars over ten years.
Republicans have asked for significant cuts to non-defense government programs, as well as the removal of clean energy tax credits and spending authorized by the Inflation Reduction Act. Republicans, on the other hand, want to reduce Biden’s IRS spending and further slash taxes, both of which might increase the deficit.
Both allegations foreshadow arguments that will very certainly be submitted to voters in this year’s presidential election.
White House spokesman Michael Kikukawa blamed the GOP, saying the steady accumulation over years was “trickle-down debt — driven overwhelmingly by repeated Republican giveaways skewed to big corporations and the wealthy.”
Republican politicians, on the other hand, have claimed that borrowing during the Biden administration contributed to the 2022 inflation rise that knocked down the Democratic president’s approval ratings.
He added, “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.”