Federal Debt

Articles, reports, and books on the federal debt and its effects tend to be complex and technical. As a result, the public frequently misunderstands these issues. For example, people often forget that even if Congress and the President agree to balance the annual budget within the next several years, the federal debt will continue to grow until balance is actually achieved. Although declining deficits and, ultimately, balanced budgets could reduce the debt as a share of the economy, the debt will not decline unless there is a budget surplus. This document responds to frequently asked questions about the federal debt, deficits, and interest rates. GAO organizes these questions into three sections: (1) trends in the federal debt, deficits, and interest; (2) sales and ownership of federal debt; and (3) effects of the federal debt. For readers who are interested in more detailed information on these topics, GAO includes a short bibliography.

GAO found that: (1) debt held by the public is the measure commonly used because it reflects how much of the nation's wealth is absorbed by the federal government to finance its obligations and best represents the current impact of past federal borrowing on the economy; (2) at the end of fiscal year (FY) 1996, the debt held by the public was $3.7 trillion, which was about three times greater in inflation-adjusted dollars than in 1980; (3) the gross debt, which totalled $5.2 trillion at the end of 1996, captures all of the federal government's outstanding debt; (4) this debt equals about one-half of the Gross Domestic Product (GDP), which is very high by historical standards; (5) without further deficit reduction actions, the debt-GDP ratio is expected to begin rising gradually over the next decade and more rapidly after 2010; (6) to reduce its debt, the government would need to run a budget surplus and use the surplus funds to pay off the principal of maturing debt securities; (7) the federal debt held by the public is owed to a variety of investors, including individuals, banks, businesses, pension funds, state and local governments, and foreign governments; (8) some believe that the automatic increase in federal borrowing that occurs during recessions helps the economy by maintaining income and spending levels, and that war-time borrowing allows a government to increase defense spending without enacting large tax increases that could be disruptive to the economy; (9) if federal borrowing is not used for any of the above purposes, many believe that the costs are more likely to outweigh the benefits; and (10) regardless of the deficit's effect on interest rates, many analysts believe that deficit reduction would free domestic funds for private sector investment, which would help boost worker productivity, economic growth, and living standards.