The last couple of years have been expensive
A deficit is what happens when the government spends more money in a fiscal year than it brings in through taxes — and the last couple of years have been expensive.
Several large bills with hefty price tags have been approved since the start of the pandemic, including the American Rescue Plan Act, which cost $1.9 trillion, and $750 billion for student debt relief, all adding to the deficit, which then adds to the debt.
And though the Inflation Reduction Act, which was passed in August, is expected to reduce the deficit by $240 billion, policies and programs brought in by the Biden administration are expected to add trillions more over the next decade.
The Committee for a Responsible Federal Budget, a non-profit that addresses federal budget and fiscal issues, estimates that $4.8 trillion will be added to the deficit by 2031.
“Excessive borrowing will lead to continued inflationary pressures, drive the national debt to a new record as soon as 2030, and triple federal interest payments over the next decade — or even sooner if interest rates go up faster or by more than expected,” says the CRFB.
Much of the borrowing in the past couple of years happened while interest rates were historically low, but now that they’re not, with inflation rising at the fastest pace in decades, the cost of this debt will be amplified.
“Having the government debt being 1.2 times larger than the economy is not a very good thing,” says Braun. “And it really jumped up because of the pandemic. But even before that, it's been rising since the great recession.”
Currently, more than $965 million is spent every day just in interest on the national debt. The Peter G. Peterson Foundation estimates that will triple over the next decade, making it the fastest-growing item in the federal budget.
And when the government owes a lot, it makes it harder for corporations to borrow money.
“The federal debt squeezes out other debts in the economy,” says Braun. “There's only so much money in the economy. And so with the government borrowing such large amounts, there's only so much that people are willing to lend overall in the economy, so it pushes out other types of borrowing.”
The government could have refinanced its debt while interest rates were low, he says, but it didn’t.
“Which means the borrowing costs today and into the future are unnecessarily higher because of that,” says Braun.
So who owns America’s national debt?
There are different kinds of national debt. Think about it like having a credit card, a mortgage and a car payment — all debt, but different.
The U.S. Department of the Treasury manages the national debt, which is split into two different types: debt that one government agency owes to another, and debts that are held by the public.
Intragovernmental debt accounts for about $6.5 trillion of the debt.
The much bigger piece of the debt is held by the public. Right now, that’s about $24 trillion.
Foreign governments as well as banks and private investors, state and local governments and the Federal Reserve own most of this debt, and it’s held in Treasury securities, bills and bonds.
Foreign governments and private investors are one of the biggest holders of the public debt, owning around $7.7 trillion.
Domestically, the Federal Reserve holds the largest share of the public debt, at about 40%. But there is good news when it comes to the debt the Federal Reserve owns.
“The Federal Reserve owns a lot of government debt,” says Braun. “The Treasury does pay interest payments to the Federal Reserve, but then the Federal Reserve turns around and gives it back to the Treasury – that alleviates some of the issues.”
More: Understanding the federal funds rate
A warning sign
Ultimately, rising interest rates will only exacerbate the national debt, making it harder for the government to respond to a slowing economy.
“For too long, policymakers have assumed perpetually low interest rates, and we are now seeing in real time how dangerous that assumption is,” said Michael A. Peterson, CEO of the Peter G. Peterson Foundation in a statement.
“As our debt crosses $31 trillion, it’s past time for action.”
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