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The nation’s debt, currently over $34 trillion, is rapidly growing
as U.S. lawmakers have been unable to agree to long-term budget
reforms that could tame it.
Officials from several institutions warn a tipping point is near and it
will only get worse if it snowballs into a crisis. The national debt is
currently almost the same size as the entire U.S. economy, which
is roughly $27.3 trillion, according to a Council on Foreign
Relations report, and is on track to double within the next thirty
years.
In the last few months, officials at several institutions including the
International Monetary Fund, Congressional Budget Office and banking
giant Goldman Sachs Group have cautioned that the country’s
skyrocketing debt is a big problem–literally bigger than ever before–and
some fear similar market chaos that derailed former UK Prime
Minister Liz Truss’ economy when she was in office in 2022.
The UK economic fiasco under Truss was due to a radical economic
proposal of tax cuts and borrowing–which triggered market
turmoil in Britain, causing the value of the pound to
plummet and Truss to announce her resignation after just six
weeks as Prime Minister.
In the U.S., IMF officials have warned that public spending and borrowing
will “overheat” the country’s economy, while pushing up funding
costs in the rest of the world. Phillip Swagel, the director of the
Congressional Budget Office, said the country’s debt is on an
“unprecedented” trajectory in an interview with
the Financial Times, and could risk a Truss-style economic crisis.
John Waldron, the president and COO of Goldman Sachs, expressed a
similar concern at Semafor’s World Economic Summit on April 18.
A Truss-style market crash in this country “is a potential risk,” said
Lawrence Gillum, chief fixed income strategist at market insights group LPL
Financial, especially “if these budget deficits continue to widen.”
“It took the U.S. around 220 years to issue $11 trillion of the national
debt, but we’ve added $11 trillion of debt over the last four years alone,”
Gillum told Fortune, adding that the national deficit spending, or the
amount the country spends in relation to how much it collects in taxes, is
also “pretty large.”
The country’s current deficit spending is $1.06 trillion, according to
fiscal year 2024 data from the Treasury Department, and while there have
been large budget deficits in the country for quite some time, Gillum
explained, “they usually aren’t as large as they are, absent a war or a
recession.” The current budget deficit, Gillum said, is “6% to 8% of gross
domestic product levels, which is pretty large in the absence of a
financial crisis.”
And as the country gears up for another election year, it’s important to
note that policies from both political sides contribute to national debt in
different ways.
Debt will be “a big topic on the campaign trail.”
“Neither party can really claim fiscal responsibility anymore because both
parties have added to the deficit,” Gillum said, citing Trump’s tax cut
programs and Biden’s spending on the Inflation Reduction Act. Indeed,
several types of spending contribute to the nation’s high debt and policies
have been rolled out by both political sides.
On one hand, there’s Bidens’ Inflation Reduction Act of 2022, a range
of tax laws and green energy tax credits heralded as a major victory for
climate change, that was meant to reduce the nation’s deficit spending
but actually increased it. Then, there’s former president Trump’s tax
bill, enacted when Republicans gained control of the White House and both
houses of Congress in 2017, which cut the corporate tax rate from 35% to
21% and slashed estate taxes for most family farmers and small-business
owners.
Simply speaking, Gillum explained, the reason the country has high debt is
due to an “increase in spending and decreasing taxes that are driving the
budget deficits wider.”
The fix, according to Quincy Krosby, a chief global strategist for LPL
Financial, is to raise taxes. “Whether it’s the Democrats or the
Republicans, you can choose to raise taxes,” she said, and doing so is
“extremely important because Americans across the country believe that
billionaires should increase the taxes they pay,” so the government can
afford programs like Social Security without deepening its debt.
As it turns out, the national debt is indeed a growing concern for
Americans. According to a 2023 Pew Research Center survey about
the public’s policy priorities, 57% of Americans believe reducing the
budget deficit should be a top priority for the president and Congress to
address this year, up from 45% the year prior.
The national debt is now higher than it’s ever been
before, according to the Treasury Department, and spiked
following the government’s response to the pandemic, Gillum said, rising
from $22.7 trillion in 2019 to over $30 trillion in 2022. There’s also no
plan in place to fix it.
“Unfortunately, politicians probably won’t react until or unless there’s a
crisis,” Gillum said, adding “this is one of the things we’ve identified as
a potential risk.”
The biggest contributor to national debt, along with years of elevated
budget deficits and colossal federal spending during the pandemic, is
spending on national emergencies, like major wars and rising healthcare
costs, according to Krosby. “All of the benefits that are expected by a
large portion of the U.S, especially when it comes to healthcare and Social
Security, and also the country’s increasing defense spending, given the
complexity of the geopolitical backdrop,” contribute to debt. It’s a
problem she acknowledges has gotten out of hand.
To be sure, the nation’s high debt and deficit spending has helped propel
the economy forward by giving individuals more money to buy and invest
more, and the “amount of debt hasn’t hindered economic growth yet,” Gillum
said. High debt does, however, add to “the inflation problem,” he added,
saying “it certainly helped the economy grow, but it’s had an impact on
higher prices as well.”
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