National Debt Tops $34 Trillion but So What?

On Dec. 29, the national debt slipped above $34 trillion for the first time.

On the date, the debt was $34,001,493,655,565.48, to be exact.

But so what?

Despite a few alarming headlines, nobody really seems to care. In fact, NPR did a story highlighting the supposed "benefits" of a massive national debt.

The debt continues to increase at a dizzying pace. When Congress effectively eliminated the debt ceiling on June 5, the national debt stood at $31.46 trillion. Since that time, the Biden administration has added $2.54 trillion to the national debt.  

The government is running up the debt at roughly $1 trillion every three months. It eclipsed $32 trillion on June 15 and $33 trillion on September 15.

Since the beginning of 2016, the total debt has spiked by $15 trillion. That’s an 80 percent increase.

It's hard to wrap one’s head around $34 trillion. To put things into perspective, every U.S. citizen would have to write a $101,234 check to pay off the debt. Every American taxpayer is on the hook for $264,090.

Or to look at it another way, $34 trillion is more than the total economies of China, Japan, Germany, and the UK combined.

It’s a Spending Problem

The Biden administration likes to blame the ballooning debt on Republican tax cuts. But while federal receipts declined last year, they shrank from decade-high levels.

In fact, the government enjoyed a revenue windfall in 2022. According to a Tax Foundation analysis of Congressional Budget Office data, federal tax collections were up 21 percent that year. Tax collections also came in at a multi-decade high of 19.6 percent as a share of GDP. But at the time, CBO analysts warned the good times wouldn’t last.  And they didn’t. Government receipts fell by 9.3 percent in fiscal 2023.

Falling revenues are certainly an issue, but you'll find the real problems on the spending side of the ledger.

On its way to the third-largest budget deficit in U.S. history, the Biden administration spent $6.46 trillion in fiscal 2023. That was an 8.8 percent year-over-year increase in actual spending. 

You might think Congress solved this problem with the “spending cuts” in the debt ceiling deal (aka the [misnamed] Fiscal Responsibility Act). But we live in an upside-down world where spending cuts mean spending still goes up.

Even if Congress and the president managed to stick to the plan (and they won’t), the so-called spending cuts will not put a dent in actual total spending. That means we can expect massive deficits to continue month after month.

This isn’t to let Republicans off the hook. Despite occasionally paying lip service to fiscal responsibility, the GOP also borrows, spends, and runs big budget shortfalls.

To put the deficits into some historical perspective, before the pandemic, the U.S. government had only run budget deficits of over $1 trillion four times — all by the Obama administration in the aftermath of the 2008 financial crisis.

The Trump administration almost hit the $1 trillion mark in 2019 and was on pace to run a trillion-dollar deficit in fiscal 2020 prior to the pandemic, even as the U.S. supposedly enjoyed the “best economy” ever. The economic catastrophe caused by the government’s response to COVID-19 gave policymakers an excuse to spend with no questions asked and we saw record deficits in fiscal 2020 and 2021.

Now the Biden administration has settled into the new status quo – running ’08 financial crisis-like deficits every single year.

Notably, this relentless increase in debt is happening when the economy is supposedly strong. Typically, a strong economy generates more tax revenue, and deficits shrink. But this isn’t really a strong economy. It is a house of cards built on debt. Fiscal stimulus is helping to prop it up.

So What?

One of the most common responses I get when I talk about the national debt is, “So what?”

After all, the national debt has been expanding precipitously for years. Nothing has happened.

At least not yet.

But this is clearly an unsustainable trajectory.

This rapid increase in the national debt is happening during a time of sharply rising interest rates. This is a big problem for a government that primarily depends on borrowing to pay its bills. 

Interest expense rose by 23 percent to $879 billion in fiscal 2023. Net interest, excluding intragovernmental transfers to trust funds, rose by 39 percent to $659 billion. Both of those numbers broke records.

Looking at November’s interest expense puts things into a little sharper perspective.

Uncle Sam spent $79.92 billion in interest expense to finance the national debt in November. That was more than national defense ($70 billion) and more than Medicare ($79 billion). The only higher spending category was Social Security.

A lot of the debt currently on the books was financed at very low rates before the Federal Reserve started its hiking cycle. Every month, some of that super-low-interest paper matures and has to be replaced by bonds yielding much higher rates.

The weighted average interest rate on the government’s $26 trillion of outstanding Treasury securities rose to 3.10 percent in November. That compares with a weighted average rate of 2.22 percent in November 2022.

Rising interest rates drove interest payments to over 35 percent as a percentage of total tax receipts in fiscal 2023. In other words, the government is already paying more than a third of the taxes it collects on interest expense.

The bottom line is interest payments will continue to quickly climb much higher unless rates fall.

This may be one of the reasons the Federal Reserve is so eager to cut interest rates in 2024 despite price inflation being nowhere near the 2 percent target.

If the national debt climbs to $40 trillion and interest rates remain at 5 percent, interest payments on the debt would skyrocket around $2 trillion per year. That means that even if the U.S. government balanced the budget so receipts covered all spending minus interest payments, we’d still be facing a $2 trillion annual deficit.

Of course, there won’t be a balanced budget. So, let’s assume the federal government can maintain the current deficit level of around $1 trillion annually (minus interest expense). Even with this overly optimistic scenario,  the Treasury would be running a $3 trillion annual budget deficit. (That’s the current $1 trillion deficit plus $2 trillion in interest expenses.)

And the most likely scenario is spending will continue to climb, along with the budget deficits. There’s no telling how high the annual deficits could run.

This is a fiscal powder keg. All it needs is a match.

*********