U.S. National Debt: Implications and Economic Impact

At a glance:

• The main takeaway: While the national debt can facilitate economic growth through strategic investment in public goods and services, thereby supporting the nation’s GDP, it also raises concerns about long-term financial health and repayment capacity.
• Impact on your business: Understanding these dynamics and adapting to shifting fiscal landscapes is essential as governmental fiscal policies, influenced by debt levels, can have direct ramifications for tax frameworks, interest rates, and economic conditions.
• Next steps: Aprio’s tax advisors are proactively monitoring tax developments to support businesses in navigating potential changes. Learn more about how we can help you prepare for and mitigate the implications of shifts in national fiscal policy.

Schedule a consultation

The full story

Debt has been a key tool for financing U.S. government spending since the country’s inception during the Revolutionary War in 1775. Over time, this debt has taken various forms, including treasury bills, bonds, and securities issued by local governments. In addition to the many forms of debt leveraged by the U.S., there are a multitude of holders ranging from the U.S. public and foreign investors to the government itself. While much of the current discourse focuses on the sheer size of the national debt, it often lacks the context needed for a better overall understanding.

To truly assess the implications of U.S. debt, it’s important to consider measures like the debt-to-GDP ratio and the assets the government holds on its balance sheet.[1]

Authors’ Note: The figures presented in this article have not been adjusted for inflation.

A brief history of the national debt

The United States first used debt for its own creation, borrowing from other nations to fund the efforts in the Revolutionary War. According to the U.S. Department of the Treasury, the U.S. had amassed $75 million in debt by the end of the war in 1783. The debt steadily grew for a period, until in 1835, when it began to shrink with the sale of federally owned lands. The proceeds from these sales made a dent in the debt, but the relief was short lived.

There was a steep increase in the national debt throughout the Civil War. Before the Civil War, the debt totaled approximately $65 million. By 1863, two years into the war, the debt had grown to $1 billion. The Civil War expenses and debt lead to the signing of the first income tax bill in 1862. Prior to 1862, most of the government funding came from tariffs and excise taxes. This income tax was found to be unconstitutional after the war, leading to the passage of the 16^th amendment which ended the debate on whether an income tax was constitutional.  

The debt remained steady through the end of the 1800s, until the beginning of World War I. To finance the U.S. involvement in WWI, the government began to issue liberty bonds, an early iteration of a treasury bill, to the public. The war and the issuance of liberty bonds grew the debt to over $22 billion by 1918. After the conclusion of the war, there was a budget surplus where the U.S. was able to pay down some of the debt, until a sharp increase in the debt arising from federal spending to mitigate the impact of the Great Depression. The federal debt then continued to increase throughout the country’s involvement in World War II. The debt stood at around $258 billion by the conclusion of WWII.

Since the end of WWII, the debt has continued to grow. Some of the major factors causing this increase includes military expenditures, international conflicts, national and global recessions, and health crises.

This continued borrowing begs the question: How do we obtain the money?

Current debt structure

The current debt of the U.S. is issued through a series of securities. While each security differs in rate and time until the security matures and how it pays interest, the concept for each is similar. Whether a bond, bill, or note, all securities issued by the treasury are a loan that the purchaser is owed the face value of the security when it matures.

Oftentimes, these securities are sold at a discount below their face value to provide a higher return on investment. Each of these securities also accrues interest periodically, which will be paid to the owner at regular intervals or at maturity. The main difference between each security is how the interest is calculated, how long the security takes to be redeemable or mature, and who can own the securities.

Regarding ownership, the securities are broken into marketable and non-marketable. Marketable securities can be traded between any individual or entity, whereas non-marketable securities are registered to a specific person and ownership cannot be traded openly. The total national debt is the aggregate of all amounts payable to each holder of a treasury security.

The following lists the Treasury Marketable Securities:

• Treasury Bills (16.9%): Public short-term security.
• Treasury Notes (40.4%): Public mid-term security.
• Treasury Bonds (13.3%): Public long-term security.
• Treasury Inflation-protected securities (5.8%): Public long-term securities where the face value redeemable at maturity will increase based on inflation.
• Floating Rate Notes (1.7%): Public short-term security with variable interest. Interest will change with the current rate offered for Treasury Notes.
• Federal Financing Bank Securities (<0.1%): Exclusively issued by the Federal Financing bank to other federal agencies.

The following lists the Non-Marketable Securities:

• Government Account Series Security (21%): Issued directly to government investment accounts, including both state and local accounts.
• U.S. Savings Bonds (0.5%): Public bonds, such as
  • EE Bonds: Fixed interest in the first 20 of a 30-year maturity period.
  • I Bonds: Long-term securities where the face value redeemable at maturity will increase based on inflation.
• State and Local Government Series Bonds (0.3%): Only available for tax advantaged securities. Exclusively issued to bring certain debts into compliance held by state and local governments.
• Domestic Series Securities (<0.1%): Issued to the Resolution Funding Corp.

What is the total debt?

As of fiscal year 2024, the total debt has reached approximately $35.5 trillion dollars per the U.S. Department of the Treasury. The debt, as of 2024, is 123% of the United States GDP. Debt to GDP is a measure used to determine the ability to pay down the debt. The higher the ratio, the more difficult experts consider it to repay.

Previously, it was thought that the government would face borrowing difficulties if the total debt were to exceed the total GDP. A high debt to GDP ratio may still indicate a limit in future spending and borrowing flexibility if the size of the economy and GDP remain stagnant as the debt grows. The debt to GDP ratio of the US was last 1 to 1 in 2015 and has sharply increased since, peaking in 2020 at 126%. This peak was the result of GDP shrinking during the COVID-19 pandemic coupled with an increase in government spending to combat the health crisis and to mitigate its economic impact.

Carrying any amount of debt comes with interest rates, whether it’s personal debt or the debt of a nation. In the case of the United States debt, there is a current net interest rate of 3.32%. The interest expense has remained steady despite the increase in total debt. The main reasons for this are low interest rates and the overall belief that there is no significant risk of the government defaulting on any payments. This belief could change if the government fails to increase the debt ceiling this summer. At this point, the U.S. would default on at least some of its debt, which would likely result in increased interest rates for future borrowing.

Who holds the debt?

As of FYE 2024, $7.16 trillion of the U.S. national debt was Intragovernmental Holdings, according to the U.S. Treasury. These amounts are debt securities held by other federal government agencies. Total intragovernmental debt accounts for slightly more than 20% of the total debt. Since these items are held by other federal agencies, the debt interest does not figure into the Net Interest calculation.

The intragovernmental debt is largely held by government trust funds and pension funds as part of their investment portfolios. The largest holder of intragovernmental debt is Social Security, which as of 2020 held 49% of all intragovernmental debt, according to the Government Accountability Office. The income generated from the bonds held by these pensions and Social Security are specifically allocated to the respective funds.

On a departmental level, these items are debt and assets, but on a total federal governmental level, the federal government acts as both lender and borrower and is responsible for the receipt and payment of all interest. For these reasons, the net interest on all intragovernmental debt is considered to be $0 as all interest paid would offset all interest earned for purposes of the national debt.

Therefore, as of FYE 2024, only $28.30 trillion of the national debt was held publicly by persons or entities. Of the $28.30 trillion, $8.53 trillion is held by foreign entities, while the remaining $19.77 trillion is held domestically. Of the foreign countries holding U.S. debt, the top five as of FYE 2024 are as follows:

1. Japan: $1.10 trillion or 3.1% of the total debt
2. China, Mainland (excluding Hong Kong): $0.77 trillion or 2.2% of total debt
3. United Kingdom: $0.77 trillion or 2.2% of total debt
4. Cayman Islands: $0.42 trillion or 1.2% of total debt
5. Luxembourg: $0.41 trillion or 1.2% of total debt

The figures presented include all debt owned by the respective countries, both by private citizens and governmental entities. Details as to specific ownership of the debt for foreign holders is not tracked by the U.S. Treasury but is assumed by the treasury to be made of a mix of private, corporate, and governmental entity investments in the United States.

We summarize the total debt in the following breakdown using the Governmental Accountability Office’s 2020 percentages applied to current day figures:

• Publicly held debt amounting to $28.3 trillion
  • 21% Domestic Investors
  • 34% International Investors
  • 45% Federal Reserve
• Intragovernmental debt amounting to $7.2 trillion 
  • 49% Social Security
  • 20% Military Retirement and Healthcare
  • 16% Civil Service Retirement and Disability
  • 11% Other Programs
  • 4% Medicare

Total debt: $35.5 Trillion

Is the U.S. insolvent?

While the debt of the United States is a measure of all of loans payable, the U.S. government also has a variety of assets that can be leveraged to cover any debt expenses.

As of FYE 2024, the U.S. government had $5.66 trillion in assets held on their balance sheet, with a notable $1.18 trillion in Cash and $1.75 trillion in loan receivables, according to the financial report of the Treasury. However, beyond the balance sheet, the federal government holds significant fixed assets that can be liquidated for cash. According to the Bureau of Economic Analysis, these include:

• National Defense Assets: Valued at $2.27 trillion (FYE 2023)
• Federal Land Owned (Approximately 28% of the total U.S. land area): Valued at $1.8 trillion (FYE 2015)
• Non-Defense Fixed Assets: Valued at $2.33 trillion (FYE 2023)

Beyond the fixed assets of the U.S., there are resources and exclusive rights the federal government holds that can be leveraged, sold, or leased. Some of these include exclusive rights to natural resources held on federal lands, with estimated values as high as $200 trillion, according to industry professionals.

Certain public services and exclusive technologies can also be leveraged. For example, the government has exclusive ownership of the GPS system and satellites. Currently, GPS is provided for free to the public and has provided an estimated economic value of $1.4 trillion, according to the Department of Commerce. Additionally, consideration can also be given to military technology and research, the value of offshore oil rights that have not yet been leased, and the value of resource deposits not yet discovered.

The bottom line

The U.S. has a longstanding practice of utilizing debt to finance national needs. This debt is an important component in funding the country’s ongoing expenses and serves as a pivotal element in many investment portfolios, given that Treasury securities are regarded as a stable form of investment.

An increase in total debt is not inherently indicative of federal distress—it must be considered alongside the growth in GDP. This growth is driven by government expenditures, government policies, and private industry.

The debt of the U.S. must also be considered against the total assets held by the federal government. While some debt is held by foreign investors, the vast majority remains domestic, contributing to the financial stability of both the federal government and the U.S. population.

Have questions about your tax situation? Aprio’s tax advisors are closely monitoring the tax landscape and are prepared to help you navigate the potential changes. Schedule a consultation today.

Related Articles

Federal Budget: How is it Structured, Generated & Spent?

Budget Reconciliation: What is it and How Does it Work?

Taxes & Tariffs: Preparing for the Incoming Administration

---

[1] GDP, or Gross Domestic Product, is a measure of a nation’s total economic output that consists of the total market value of all the final goods and services produced within a set time period.