Is the US Going Broke? A Look at National Finances

The question of whether the United States is “going broke” often arises in public discourse, reflecting common concerns about the nation’s financial future. This article aims to provide a factual and accessible overview of the current state of US federal finances. It will demystify various financial concepts, breaking them down into terms understandable for a general audience. The objective is to offer a clear picture of the federal government’s fiscal position without delving into speculative outcomes.

Understanding the National Debt

The national debt is the total amount the federal government has borrowed over time. It accumulates when government spending exceeds its revenue, resulting in annual budget deficits. To finance these deficits, the Treasury Department issues various securities, such as Treasury bonds, bills, and notes, which are sold to investors.

The national debt consists of “debt held by the public” and “intragovernmental holdings.” Debt held by the public is owned by individuals, corporations, state and local governments, foreign governments, and the Federal Reserve. It represents cash borrowed from external lenders.

Intragovernmental holdings are non-marketable Treasury securities held by federal government accounts, such as the Social Security and Medicare trust funds. This debt represents cumulative surpluses of these programs invested in Treasury securities. As of late 2024, debt held by the public was approximately $28 trillion, while intragovernmental holdings amounted to about $7 trillion.

A diverse group of entities owns the US national debt. Domestic holders include mutual funds, depository institutions, state and local governments, pension funds, and insurance companies. The Federal Reserve System is a significant domestic holder.

Foreign entities, including central banks and private investors, also hold a substantial portion. As of April 2024, foreign countries owned approximately $7.9 trillion in Treasuries, representing about 22.9% of the total US debt. Japan and China are among the largest foreign holders.

The national debt has grown significantly throughout US history, often driven by major national events. Notable increases occurred during major conflicts like the Civil War and World War I, and more recently, the 2008 Great Recession and the COVID-19 pandemic. Since 2017, the national debt has continued to rise, with substantial increases following tax cuts, stimulus programs, and increased government spending.

The annual budget deficit is the amount by which government spending exceeds its revenue in a given fiscal year. This deficit adds to the national debt. For example, in fiscal year 2024, the federal government spent $6.75 trillion and collected $4.92 trillion, resulting in a deficit of $1.83 trillion.

Government Spending and Revenue

Federal government operations are financed through a combination of tax collections and borrowing. In fiscal year 2024, total federal spending reached $6.75 trillion, while revenue was $4.92 trillion, leading to a budget deficit. This financial gap highlights the relationship between government income and expenditures.

Government spending is broadly categorized into mandatory spending, discretionary spending, and net interest on the national debt. Mandatory spending, which constitutes nearly two-thirds of annual federal spending, is determined by existing laws and does not require annual congressional approval. Major programs in this category include Social Security, Medicare, and Medicaid. These programs are often referred to as “entitlements” because eligible individuals are guaranteed benefits.

Discretionary spending, in contrast, is subject to annual appropriation bills passed by Congress. This category funds a wide array of government activities, including national defense, education, transportation, environmental protection, scientific research, and law enforcement. In fiscal year 2024, discretionary spending made up approximately 26% of the budget. The third category, net interest, represents the cost of servicing the national debt.

The federal government collects revenue from several primary sources. Individual income taxes are the largest source, contributing about 49% of total revenue in fiscal year 2024. This system features progressive tax rates.

Payroll taxes, primarily used to fund Social Security and Medicare, represent the second largest source, accounting for approximately 35%. These taxes are collected from both employees and employers. Corporate income taxes contribute about 11%.

Other revenue sources include excise taxes on specific goods like gasoline, tobacco, and alcohol, as well as customs duties and other miscellaneous fees. The relationship between government spending and revenue directly determines whether the nation experiences a budget deficit or a surplus.

Key Measures of Fiscal Health

Assessing a nation’s fiscal health involves looking beyond raw dollar figures to understand the context of its economic capacity. Key metrics are used by economists and financial experts to provide a nuanced perspective on the sustainability of government finances. These measures help to evaluate the burden of debt relative to the economy’s size and ability to generate revenue.

The debt-to-GDP ratio is a primary indicator of a country’s fiscal health, comparing the total national debt to its Gross Domestic Product (GDP). This ratio indicates the nation’s ability to repay its obligations relative to its overall economic output; a higher ratio suggests a greater burden on the economy. In fiscal year 2024, the US debt-to-GDP ratio was approximately 123%. Debt held by the public, a more commonly cited measure for fiscal health, was about 98% of GDP at the end of fiscal year 2024.

Another important metric is the deficit as a percentage of GDP, which illustrates the annual fiscal balance relative to the size of the economy. This measure shows whether the government is adding to the debt at a sustainable rate each year. In fiscal year 2024, the federal budget deficit was approximately 6.4% of GDP. This percentage has been higher than the 50-year average of 3.8%. While deficits tend to grow during economic downturns, persistent high deficits can contribute to long-term debt accumulation.

Interest payments on the national debt, particularly as a percentage of federal revenue or GDP, reveal the cost of servicing the existing debt. This indicates how much of the government’s income is allocated simply to pay interest, rather than funding public services or investments. In 2024, the federal government spent $880 billion on net interest costs, which amounted to 3.1% of GDP. This figure represented a 34% increase from the previous year. Interest costs are projected to reach 3.2% of GDP in 2026, and as a share of federal revenues, are expected to rise significantly, reaching 18.4% by the end of 2025.

When comparing the US to other major developed economies on these metrics, it is observed that debt-to-GDP ratios vary widely among nations. The US falls within a range seen across developed countries, some with higher and some with lower ratios. Such comparisons provide context regarding the scale of US debt relative to its economic peers, without implying a judgment on performance or policy. The analysis of these fiscal health measures offers a comprehensive view of the nation’s financial standing and its capacity to manage its debt obligations.

Underlying Fiscal Trends

Several long-term demographic and economic trends significantly influence the US fiscal outlook. These structural factors affect both federal spending requirements and revenue generation over time, shaping the trajectory of national finances. Understanding these trends is important for comprehending the ongoing fiscal discussions.

The aging of the US population has a substantial impact on mandatory spending programs like Social Security and Medicare. As the proportion of older adults increases relative to the working-age population, there are more beneficiaries receiving payments and fewer workers contributing through payroll taxes. This demographic shift places increasing pressure on the financial sustainability of these programs.

Rising healthcare costs also have significant implications for federal spending, particularly through Medicare and Medicaid. The general inflation in healthcare services, advancements in medical technology, and increased utilization of healthcare services contribute to higher expenditures. These escalating costs exert upward pressure on the federal budget, as the government is committed to providing healthcare benefits to eligible populations. This trend is a major driver of increases in mandatory spending.

Economic growth rates play a crucial role in influencing federal revenue and spending. During periods of robust economic growth, tax revenues naturally increase as incomes rise and economic activity expands. Conversely, economic recessions typically lead to a reduction in federal revenue due to lower individual and corporate incomes. At the same time, recessions often trigger increased federal spending on programs such as unemployment benefits and other forms of economic assistance. This dynamic creates a fiscal challenge, as revenue declines while spending potentially increases during economic downturns.

Changes in interest rates directly affect the cost of servicing the national debt. When interest rates rise, the government’s cost of borrowing increases, leading to higher interest payments on both newly issued debt and existing debt that needs to be refinanced. Conversely, lower interest rates can reduce the burden of debt servicing. The Congressional Budget Office projects that net interest payments will continue to rise in the coming years due to a combination of higher interest rates and a growing national debt. These payments have already become a significant portion of federal spending, underscoring the sensitivity of the budget to interest rate fluctuations.