Is the United States Going Broke? What You Need to Know

Many individuals express concern about the financial health of the United States. Understanding federal finance requires a clear overview of the US financial situation. This article provides a foundational understanding of how the nation manages its fiscal affairs.

Understanding Public Debt

The term “national debt” refers to the total amount of outstanding borrowing by the U.S. federal government accumulated throughout the nation’s history. This debt arises when the government’s spending exceeds its revenue in a given fiscal year, resulting in a budget deficit. To cover these shortfalls, the Treasury Department issues various marketable securities, such as Treasury bonds, bills, and notes, which are purchased by investors. As of June 2025, the total national debt was approximately $36.2 trillion.

The national debt is broadly categorized into two main components: debt held by the public and intragovernmental holdings. Debt held by the public represents the portion of the national debt owed to entities outside the federal government. This includes individuals, corporations, state and local governments, the Federal Reserve System, and foreign investors. As of May 2025, private investors held about two-thirds of the national debt, totaling approximately $24.4 trillion.

Intragovernmental holdings represent debt that the government owes to itself. This primarily consists of non-marketable Treasury securities held by various federal trust funds and government accounts, such as the Social Security Trust Fund and Medicare’s trust funds. These holdings represent cumulative surpluses from these programs that have been invested in Treasury securities, representing a future obligation for the government to repay these funds.

Domestic private investors, including mutual funds, pension funds, and individual citizens, hold a significant portion of the U.S. national debt. The Federal Reserve also holds a considerable amount as part of its monetary policy operations, buying and selling Treasury bonds to influence the money supply and interest rates. State and local governments also invest in federal debt.

Foreign entities, including foreign governments and private investors, are substantial holders of U.S. debt. As of December 2024, approximately $8.5 trillion, or 23.5% of the total, was held overseas. Japan, the United Kingdom, and China are among the largest foreign holders of U.S. Treasury securities.

Historically, the U.S. has carried debt since its inception, with significant increases during major events such as wars and economic crises. For example, the debt grew substantially during World War I, the 2008 Great Recession, and the COVID-19 pandemic. The debt-to-Gross Domestic Product (GDP) ratio is often used to assess a country’s ability to manage its debt, showing the burden relative to its economic output. While the nominal amount of debt has reached all-time highs, its proportion relative to GDP provides a broader economic context.

Government Revenue and Expenditure

The federal government finances its operations through a combination of revenue collection and borrowing. The primary sources of federal government revenue are various forms of taxation. In fiscal year (FY) 2024, the U.S. federal government collected approximately $4.9 trillion in revenue. The largest share of this revenue comes from individual income taxes, which accounted for approximately 49% of total revenue in FY 2024. This tax is levied on the earnings of individuals and is structured progressively, meaning higher earners generally pay a larger percentage of their income.

Payroll taxes represent another substantial source of federal revenue, contributing about 35% of total revenue in FY 2024. These taxes primarily fund social insurance programs such as Social Security and Medicare. Both employees and employers contribute to these taxes, which are specifically earmarked for their respective trust funds. Corporate income taxes, levied on company profits, made up approximately 11% of federal revenue in FY 2024. Other miscellaneous revenues, including excise taxes, estate and gift taxes, customs duties, and earnings from the Federal Reserve System, account for the remaining portion of federal income.

Federal government expenditure is broadly categorized into three main types: mandatory spending, discretionary spending, and interest payments on the national debt. Mandatory spending constitutes the largest portion, typically representing around two-thirds of annual federal spending. This category includes programs for which spending is determined by existing laws, rather than annual appropriations. Major mandatory spending programs include Social Security, Medicare, and Medicaid, which provide benefits to eligible individuals.

Discretionary spending requires annual approval through the congressional appropriations process. This category covers a wide range of government activities, including national defense, education, transportation, and scientific research. Defense spending often accounts for a significant portion of discretionary outlays.

Interest payments on the national debt represent the cost of borrowing by the federal government. This category of spending is influenced by both the total amount of outstanding debt and prevailing interest rates. In fiscal year 2024, net interest expense amounted to $879.9 billion, representing 13% of all federal expenditures, which was the highest share in a quarter-century. The federal government must make these payments to bondholders, which are automatically appropriated funds.

The relationship between government revenue and expenditure directly determines whether the nation experiences a budget surplus or deficit. When government spending exceeds revenue, a budget deficit occurs, requiring the government to borrow money to cover the shortfall. Conversely, a budget surplus arises when revenue collected exceeds expenditures, allowing the government to reduce its outstanding debt.

How National Debt Differs from Personal Debt

Comparing the national debt to personal household debt is a common analogy, but it overlooks several fundamental distinctions between a sovereign nation and an individual. A government, particularly one like the U.S., possesses unique powers and characteristics that differentiate its financial operations from those of a household.

One primary distinction is the U.S. government’s inherent ability to tax its citizens and businesses. This power provides a continuous and substantial revenue stream that individuals do not possess. The government can adjust tax rates or introduce new taxes to influence its revenue collection.

Another significant difference lies in the government’s power to issue its own currency. The U.S. government, through the Federal Reserve, can create its own currency, which an individual cannot do. This capability means the government can always technically meet its obligations denominated in its own currency. While currency creation has economic implications, it provides a fundamental flexibility in managing debt that is absent for a household.

Furthermore, a sovereign government has a perpetual existence, unlike an individual whose financial life is finite. Governments do not have a “retirement” or a fixed end date for their financial obligations. This allows the government to manage its debt over very long horizons, often refinancing existing debt by issuing new securities. For a household, debt repayment is typically structured with a clear end date.

Government bonds, which constitute the majority of the national debt, also serve a unique role as a safe investment. U.S. Treasury securities are widely considered among the safest investments globally due to the full faith and credit of the U.S. government. This high level of trust attracts a broad range of investors, including domestic and foreign entities, who are willing to lend to the government, often at relatively low interest rates. For individuals, borrowing is based on personal creditworthiness and carries higher perceived risk.

These distinctions illustrate why the concept of a sovereign nation “going broke” in the same manner as an individual or a company is not directly analogous. While governments face financial constraints and consequences for their fiscal policies, their inherent powers related to taxation, currency issuance, and perpetual existence provide different mechanisms for debt management than those available to private citizens.

Economic Implications of Fiscal Trends

Significant fiscal trends, such as persistent budget deficits and a growing national debt, interact with and influence the broader economy. These interactions can affect several economic indicators, including inflation, interest rates, currency value, and long-term economic growth.

Large government spending, particularly when not offset by sufficient revenue, can contribute to inflationary pressures under specific economic conditions. If government spending significantly increases overall demand in an economy that is already operating near its full capacity, it can lead to rising prices. This occurs when the supply of goods and services cannot keep pace with the increased demand, potentially resulting in inflation.

Increased government borrowing, necessitated by deficits, can also influence overall interest rates in the economy. When the government issues a large volume of Treasury securities to finance its debt, it increases the demand for credit in financial markets. This increased demand can, in turn, put upward pressure on interest rates, making it more expensive for businesses and individuals to borrow money for investments or purchases. This phenomenon is sometimes referred to as the “crowding out effect,” where government borrowing absorbs available financial capital, potentially reducing the funds available for private sector investment.

Perceptions of a nation’s fiscal stability can affect the international value of its currency. If global investors perceive a nation’s fiscal trends as unsustainable or indicative of future economic instability, they might reduce their demand for that nation’s currency and its debt instruments. A decrease in demand for a currency can lead to its depreciation relative to other currencies, impacting trade and investment flows. Conversely, confidence in fiscal management can strengthen a currency.

The allocation of resources resulting from fiscal trends can also impact long-term economic growth. When a substantial portion of the federal budget is allocated to interest payments on the national debt, fewer resources may be available for productive investments in areas like infrastructure, education, or research and development. This redirection of resources away from investments that could boost productivity and innovation might affect the economy’s long-term growth potential. However, government spending can also encourage growth through investments in public infrastructure or human capital, depending on how funds are utilized.