Deficits, Debt, and the Economy: An Introduction
Deficits, Debt, and the Economy:
December 20, 2022
An Introduction
Grant A. Driessen
The federal government incurs a budget deficit when its total outgoing payments (outlays) exceed
Specialist in Public Finance
the total money it collects (revenues). If instead federal revenues are greater than outlays, then
the federal government generates a surplus. Deficits are measured over the course of a defined
period of time—in the case of the federal government, a fiscal year.
Debt measurements may be taken at any point in time, and represent the accumulation of all previous government borrowing
activity from private citizens, institutions, foreign governments, and other parts of the federal government. Federal debt
increases when there are net budget deficits and outflows made for federal credit programs, which combine to represent debt
held by the public—the debt measure of primary interest to budget and financial observers. Federal debt also rises through
increases in intragovernmental debt, which is generated by trust fund surpluses that are used to finance other government
activity. Federal debt declines when there are budget surpluses, a reduction in the federal credit portfolio, or decreases in
intragovernmental borrowing.
Federal deficit and debt outcomes are interdependent: budget deficits increase federal debt levels, which in turn increase
future net deficits. The nature of the relationship between deficits and debt varies depending on the type of debt considered.
Budget deficits are the principal contributor to debt held by the public. The effect of deficits on intragovernmental debt is less
certain than their contribution to debt held by the public. All else equal, increases in net trust fund deficits will lead to
increases in total budget deficits but decreases in intragovernmental debt.
Interest payments made on publicly held debt instruments contribute directly to federal deficits. Holders of federal debt are
compensated by receiving interest payments from Treasury. Intragovernmental debt does not contribute to future deficits.
Persistent budget deficits and a large and increasing federal debt have generated discussions over the long-term sustainability
of current budget projections. The historic economic shocks of the Great Recession and COVID-19 pandemic and ensuing
federal responses generated the five largest real federal deficits (measured as a share of total output) since World War II.
Publicly held debt is projected to be 96% of GDP at the end of FY2023, roughly triple the value recorded at the end of
FY2001 (32% of GDP). Budget forecasts project rising deficits and accelerated increases in publicly held debt in ensuing
decades.
Over time, persistent budget deficits can hamper economic growth. Deficits represent an intertemporal transfer from later
generations to the current one, as money borrowed now will eventually require repayment with interest. The effect of deficit
financing on economic output depends on the nature of the government activity being financed and the private activity that
would have otherwise taken place.
Federal debt is constrained by the willingness of investors to finance borrowing. While the amount of federal borrowing
investors will finance may be affected by economic growth and other factors, real federal debt cannot increase indefinitely.
There are no signs that federal borrowing capacity will be exhausted in the short term. However, the consequences of
exhausted fiscal space may be worth considering when examining the medium- and long-term trajectory of the federal
budget.
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Contents
Introduction ..................................................................................................................................... 1
Background ..................................................................................................................................... 1
What Is a Deficit? ...................................................................................................................... 1
What Is the Debt? ...................................................................................................................... 2
Comparing Debt Held by the Public and Intragovernmental Debt ..................................... 2
Deficit and Debt Interaction ............................................................................................................ 3
How Deficits Contribute to Debt .............................................................................................. 4
How Debt Contributes to Deficits ............................................................................................. 5
Economic Theory, Deficits, and Debt: In Brief ............................................................................... 6
How Deficits and Debt Contribute to the Economy: Short-Run Effects ................................... 6
How Deficits and Debt Contribute to the Economy: Long-Run Effects ................................... 8
How the Economy Contributes to Deficits ............................................................................... 9
How the Economy Contributes to Debt .................................................................................. 10
Deficit and Debt Outlook ............................................................................................................... 11
International Context ............................................................................................................... 12
Figures
Figure 1. Federal Debt, FY1973-FY2022 ....................................................................................... 4
Figure 2. Total and Primary Federal Budget Outcomes, FY1973-FY2022 ..................................... 6
Figure 3. Economic and Federal Budget Outcomes, FY1973-FY2022 ......................................... 10
Tables
Table 1. Features of Debt Held by the Public and Intragovernmental Debt .................................... 3
Table 2. Recent CBO Forecasts of Federal Debt Held by the Public ............................................. 11
Table 3. IMF General Gross Debt for G7 Countries, 2002-2022 .................................................. 12
Contacts
Author Information ........................................................................................................................ 13
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Deficits, Debt, and the Economy: An Introduction
Introduction
Persistent annual budget deficits and a large and increasing federal debt have generated
discussions over the long-term sustainability of current budget projections. The Great Recession
and COVID-19 pandemic and ensuing federal responses generated the five largest real federal
deficits (measured as a share of gross domestic product, or GDP) since World War II. Publicly
held debt is projected to be 96% of GDP at the end of FY2023, roughly triple the value recorded
at the end of FY2001 (32% of GDP). Budget forecasts project rising deficits and accelerated
increases in publicly held debt in ensuing decades. This report explores distinctions in the concept
and composition of deficits and debt and explains how they interact with economic conditions
and other aspects of fiscal policy.
Background
What Is a Deficit?
A deficit describes one of the three possible outcomes for the federal budget.1 The federal
government incurs a deficit (also known as a net deficit) when its total outgoing payments
(outlays) exceed the total money it collects (revenues). If instead federal revenues are greater than
outlays, then the federal government generates a surplus. A balanced budget describes the case
where federal receipts equal federal expenditures.2 The size of a deficit or surplus is equal to the
difference between the levels of spending and receipts. Deficits are measured over the course of a
defined period of time—in the case of the federal government, a fiscal year.3
Federal budget outcomes incorporate both “on-budget” activities, which represent the majority of
federal taxes and spending, and “off-budget” government activities, which include revenues and
outlays from Social Security trust funds and the Postal Service. For federal credit programs, the
subsidy cost of government activities is included in deficit and surplus calculations.4 The federal
budget is constructed in a manner that provides for lower net deficits in more robust economic
conditions, attributable to higher revenues (from taxes on increased output) and, to a smaller
degree, lower spending levels (from reduced demand for programs like unemployment
insurance).
The Congressional Budget Office (CBO) projects that the federal government will record a deficit
of $984 billion in FY2023, equivalent to 3.8% of GDP. From FY1973 to FY2022, the average net
deficit equaled 3.6% of annual GDP ($942 billion in FY2023 dollars). Over the FY1973-FY2022
1 Unlike many state and local governments, the federal government has no statutory balanced-budget requirement.
2 For a more thorough discussion of budget concepts, see Office of Management and Budget, FY 2023 Budget:
Analytical Perspectives, February 2023.
3 As compared to the calendar year, the federal fiscal year runs from October of the previous year through September of
the current year. For example, FY2023 began on October 1, 2022, and will end on September 30, 2023.
4 The Federal Credit Reform Act of 1992 (P.L. 101-58) defines subsidy costs as “the estimated long-term cost to the
government of a loan guarantee, calculated on a net present value basis, excluding administrative costs.” Subsidy costs
therefore represent a projection of the final cost to the government of a credit program, and not the inflow or outflow of
money for the activity. For more information about subsidy costs and their effect on the federal budget, see CRS Report
R44193, Federal Credit Programs: Comparing Fair Value and the Federal Credit Reform Act (FCRA), by Raj
Gnanarajah.
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period, the government generated a surplus on four occasions—in each year from FY1998
through FY2001. In all other years, the federal government incurred a net deficit.5
What Is the Debt?
The federal debt is the money that the government owes to its creditors, which include private
citizens, institutions, foreign governments, and other parts of the federal government. Debt
measurements may be taken at any time and represent the accumulation of all previous
government borrowing activity. Federal debt increases when there are net budget deficits,
outflows made for federal credit programs (net of the subsidy costs already included in deficit
calculations), and increases in intragovernmental borrowing. Federal credit programs include
loans issued for college tuition payments, small business programs, and other activities the
government may seek to support.6 In those cases, debt levels increase as additional loans are
granted and decrease as money for such programs is repaid.
Intragovernmental debt is generated when trust funds, revolving funds, and special funds receive
money from tax payments, fees, or other revenue sources that is not immediately needed to make
payments. In those cases the surpluses are used to finance other government activities, and
Government Account Series (GAS) securities are issued to the trust fund. GAS securities may
then be redeemed when trust fund expenditures exceed revenue levels. Intragovernmental debt
may be thought of as money that one part of the government owes another part.
The Department of the Treasury is responsible for managing federal debt. The primary objective
of Treasury’s debt management strategy is to fulfill the government’s borrowing needs at the
lowest cost over time.7 Treasury finances federal borrowing activities by issuing government-
backed securities that generate interest payments for their owners. Treasury securities are
typically sold to the public through an auction process, and have maturity periods (the length of
time that they are held before repayment) of anywhere from several weeks to 30 years.8
Comparing Debt Held by the Public and Intragovernmental Debt
Federal debt may be divided into two major categories: (1) debt held by the public, which is the
sum of accrued net deficits and outstanding money from federal credit programs; and (2)
intragovernmental debt. As of September 30, 2022, the amount of federal debt outstanding was
$30.929 trillion, with 78.6% of that debt held by the public and 21.4% held as intragovernmental
debt.9 Table 1 summarizes the composition of debt held by the public and intragovernmental
debt.
5 Office of Management and Budget, Fiscal Year 2023 Historical Tables, Table 1.1, at https://www.whitehouse.gov/
sites/default/files/omb/budget/fy2023/assets/hist.pdf.
6 For more information about the accounting methods used in deficit and debt calculations, see CRS Report R43811,
Cash Versus Accrual Basis of Accounting: An Introduction, by Raj Gnanarajah; and CRS Report R44002, Cash Versus
Accrual Accounting: Tax Policy Considerations, by Raj Gnanarajah and Mark P. Keightley.
7 U.S. Department of the Treasury, Duties & Functions of the U.S. Department of the Treasury, at
http://www.treasury.gov/about/role-of-treasury/.
8 For more information about Treasury’s debt management practices, see CRS Report R40767, How Treasury Issues
Debt, by Grant A. Driessen.
9 Unless otherwise noted, federal debt totals are taken from U.S. Treasury, “Monthly Statement of the Public Debt,
September 2022,” at https://fiscaldata.treasury.gov/datasets/monthly-statement-public-debt/summary-of-treasury-
securities-outstanding.
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Table 1. Features of Debt Held by the Public and Intragovernmental Debt
Publicly Held Debt
Intragovernmental Debt
Origin
Budget deficits and the federal loan
Federal trust fund surpluses
portfolio
Ownership
Individuals and institutions
(domestic and foreign); state and
Federal government accounts
local governments; foreign
governments
Debt outstanding
$24.3 tril ion (79% of all debt)
$6.6 tril ion (21% of all debt)
Share of marketable securities
97%
0.3%
Financial market presence
Debt issuances may compete for
Debt issuances do not appear in
private assets exchanged in the
public markets and thus do not
financial market
compete for private assets
Source: U.S. Treasury, Monthly Statement of the Public Debt, September 2022, at https://fiscaldata.treasury.gov/
datasets/monthly-statement-public-debt/summary-of-treasury-securities-outstanding.
Note: Debt values as of September 30, 2022.
Individuals, firms, the Federal Reserve, state and local governments, and foreign governments are
all eligible to purchase publicly held debt. Debt may be acquired directly through the auction
process, from which most publicly held debt is initially sold, or on the secondary market if the
debt is deemed “marketable” or eligible for resale.10 The total amount of publicly held debt
outstanding was $24.3 trillion as of September 30, 2022.
The majority of publicly held debt is marketable, and includes all Treasury Notes, Bonds, Bills,
Treasury Inflation Protected Securities (TIPS), and Floating Rate Notes (FRNs) issued by
Treasury. Nonmarketable debt held by the public is composed of U.S. Savings Bonds, State and
Local Government Securities (SLGS), and other, smaller issues. As of September 30, 2022, 97%
of publicly held issues, or $23.7 trillion, was marketable.
Intragovernmental debt is debt where the federal government is both the creditor and the
borrower. Intragovernmental debt issuances are almost exclusively nonmarketable, as marketable
debt comprised only $0.02 trillion (0.3%) of the $6.6 trillion in total intragovernmental debt on
September 30, 2022. The majority of nonmarketable intragovernmental debt was held by trust
funds devoted to Social Security and military and federal worker retirement. Marketable
intragovernmental debt is composed primarily of debt held by the Federal Financing Bank, which
is a government corporation created to reduce the cost of federal borrowing.
Since intragovernmental debt is held only in government accounts, such debt cannot be accessed
by institutions outside the federal government. Conversely, the bonds that finance publicly held
debt activity may compete for assets in private and financial markets. Public debt issues may be a
particularly attractive collateral option on the secondary market if the federal government is
perceived as a safe credit risk.
Deficit and Debt Interaction
Federal deficit and debt outcomes are interdependent; budget deficits increase federal debt levels,
which in turn increase future net deficits because of the need to service higher interest payments
10 The Banking Act of 1935 (P.L. 74-305) prohibited the Federal Reserve from purchasing Treasury securities directly
(at auction). The Federal Reserve may purchase Treasury securities on the secondary market.
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on the nation’s debt. The nature of the relationship between deficits and debt varies depending on
the type of debt considered. This section describes the relationship between federal deficits and
debt.
How Deficits Contribute to Debt
Budget deficits are the principal contributor to debt held by the public. To finance budget deficits,
Treasury sells debt instruments. The value of those debt holdings (which include interest
payments) represents the vast majority of publicly held debt. From FY1973 to FY2022, annual
nominal budget deficits and surpluses of the federal government summed to $22.0 trillion; over
the same period, total debt held by the public increased by $24.0 trillion.11 Publicly held debt has
been the biggest determinant of historical changes in the total stock of federal debt. Figure 1
shows changes in federal debt levels from FY1973 through FY2022. Though there has been a
gradual increase in intragovernmental debt in recent decades, the decline in real debt following
World War II and subsequent increase in debt levels beginning in the late 1970s were each caused
primarily by similar changes in the stock of publicly held debt over those time periods.
Figure 1. Federal Debt, FY1973-FY2022
(as a % of GDP)
Source: Congressional Budget Office.
11 Congressional Budget Office, Historical Budget Data, May 2022, at https://www.cbo.gov/about/products/budget;
Congressional Budget Office, Monthly Budget Review, September 2022, at https://www.cbo.gov/about/products/
budget; and .S. Treasury, “Monthly Statement of the Public Debt, September 2022,” at https://fiscaldata.treasury.gov/
datasets/monthly-statement-public-debt/summary-of-treasury-securities-outstanding.
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How Debt Contributes to Deficits
Present borrowing outcomes affect future budgeting outcomes. Publicly held debt contributes
directly to federal deficits through interest payments on debt issuances. Interest payments are
made to both debt held by the public and intragovernmental debt. As the government serves as
buyer and seller of intragovernmental debt, interest payments on those holdings do not affect the
federal budget deficit.12 However, interest payments made on publicly held debt represent new
federal spending, and are recorded in the budget as outlays when payments are made. The
government incurs interest costs when it opts to finance spending through borrowing rather than
through increased revenues. Net interest payments represent the amount paid from the
government to debt holders in a given time period, less interest payments received for federal
loan programs.13
For investors, purchasing a debt issuance represents both a loss of liquidity relative to currency
holdings (money paid for the debt holding can be used immediately, while the debt issuance may
only be resold on the secondary market or held until the date of maturity) and an opportunity cost
(the money used for the purchase could have been spent on other items, invested elsewhere, or
saved). Debt holders are compensated for those costs by receiving interest payments from
Treasury on their issuances.
Determinants of Net Interest Payments
The amount of net interest payments owed by the federal government depends on the existing stock of federal
debt and the interest rate on outstanding debt instruments. The structure of the interest payments may be fixed
or variable, depending on the type of debt issuance. In either case, the terms of interest are agreed to in advance
of sale. Interest rates on debt vehicles are largely determined by prevailing economic conditions. Situations where
the private cost of borrowing (interest rate) is high wil raise interest rates on federal debt and thereby increase
net interest payments. Increases in the amount of existing debt wil also lead to a rise in net interest payments, as
they increase the base on which a given interest rate is applied.
From FY1973 to FY2022 net interest payments averaged 2.0% of annual GDP, equivalent to
about $534 billion annually in 2023 dollars. High interest rates and increasing debt levels caused
the net interest burden to peak in the 1980s and 1990s. Recent net interest payments have been
lower than their long-term averages; in FY2023 net interest payments are projected to be $442
billion, or 1.7% of GDP. Recent net interest payments were the product of sustained low interest
rates and relatively high levels of real debt. Unless the federal debt is reduced, net interest
payments will increase if the recent shift away from a low interest rate environment persists. In its
most recent forecast, the Congressional Budget Office (CBO) projects that real net interest
payments will increase to 3.3% of GDP by FY2032.14
One way to measure the effect of debt on future deficits is to examine the relationship between
total federal deficits and the primary deficit, which measures the balance of revenues and
expenditures with net interest payments excluded. Figure 2 shows total and primary budget
12 Although intragovernmental debt does not affect net interest payments, shifts in certain types of intragovernmental
debt may serve as a signal of future budgetary challenges. A notable example of such signaling may be seen with the
increases in intragovernmental debt held by trust funds devoted to Social Security. Intragovernmental debt from those
funds began increasing in the 1980s, as the entry of the “Baby Boomer” generation into the workforce increased
payments into the Social Security system, and produced surpluses in Social Security trust funds. All else equal, the
eventual retirement of those same workers has led to payments from Social Security trust funds exceeding revenues,
thereby drawing down from excess funds in those accounts.
13 The combined interest paid on debt held by the public and intragovernmental debt is known as gross interest
payments.
14 Congressional Budget Office, The Budget and Economic Outlook: 2022 to 2032, May 2022.
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outcomes from FY1973 through FY2022. The gap between the total and primary outcomes in a
given year is explained by net interest payments. The primary deficit averaged 1.6% of GDP from
FY1973 to FY2022, as compared to the average total budget deficit of 3.6% of GDP recorded
over the same time period. While the federal government recorded a budget surplus four times
from FY1973 to FY2022, in eight other years it registered a primary surplus, most recently in
2007.
Figure 2. Total and Primary Federal Budget Outcomes, FY1973-FY2022
(as a % of GDP)
Source: Congressional Budget Office; CRS calculations.
Economic Theory, Deficits, and Debt: In Brief
This section provides a primer of how government deficits and debt are integrated into the larger
economy in both the short and long run, and provides some ways to measure such interactions.
The nature of interaction between fiscal outcomes and economic performance may have
ramifications for how Congress wishes to distribute its activity both within a recession or
expansion and for what fiscal targets it wishes to set in the long run.
How Deficits and Debt Contribute to the Economy: Short-Run
Effects
In the short run, when economic output is assumed to be fixed, output is a function of both private
and public activity. Equation (1), also known as the national accounting identity, shows the
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different choices that can be made with all economic output in a given time period. It states that
output (Y) in a given economy is equal to the sum of private consumption (C), private investment
(I), net government investment (G), and net exports (X). Put another way, equation (1) asserts that
output is the sum of private consumption, private saving, and net government activity. The net
government deficit, or G, is shown in equation (2) as spending (S) less revenues (R). Absent a
monetary policy intervention by the Federal Reserve (which makes monetary decisions
independently), G must be obtained through government borrowing, or debt.15
(1) Y = C + I + G + X
(2) G = S - R
Since the levels of output (Y) and consumption (C) in a given time period are fixed, increases in
government investment (G) will reduce private investment (I), net exports (X), or some
combination thereof. Government borrowing increases that reduce private investment are
commonly categorized as “crowding out,” and represent a shift from private investment to public
investment.
Increased government borrowing that reduces net exports (generated by borrowing from foreign
sources) represents an expansion of the short-term money supply, as money is being brought into
the economy now at the expense of the future stock of money (as foreign borrowing is repaid).
Such a fiscal expansion increases the quantity of money demanded, which drives up interest rates
(or cost of borrowing).16
The federal government may choose to generate short-run budget deficits for a few reasons.
Deficit financing, or payment for federal government activity at least partly through debt
increases, increases the total level of spending in the economy. Most economists believe that the
implementation of deficit financing can be used to generate a short-term stimulus effect, either for
a particular industry or for the entire economy. In this view, increases in expenditures and tax
reductions can be used to generate employment opportunities and consumer spending and reduce
the intensity of stagnant economic periods.
Deficit financing is a less effective countercyclical strategy when it leads to “crowding out,” or
when government financing merely replaces private-sector funding instead of inducing new
economic activity, and is more likely to occur in periods of robust economic growth. Deficit
reduction when the economy is operating near or at full potential can help prevent the economy
from overheating and avoid “crowding out” of private investment, which could have positive
implications for intergenerational equity and long-term growth.
Deficit financing may also be used as part of a structurally balanced budget strategy, which alters
government tax and spending levels to smooth the effect of business cycles. Smoothing budgetary
changes may reduce the economic shocks deficits induce among businesses and households.
Governments may also use federal deficits or surpluses to spread the payment burden of long-
term projects across generations. This sort of intergenerational redistribution is one justification
for the creation of long-run trust funds, such as those devoted to Social Security.
15 This report does not analyze interactions among monetary policy, federal debt, and economic outcomes. Federal
monetary policy is generally delegated to the Federal Reserve. For more on monetary policy issues, see CRS Report
RL30354, Monetary Policy and the Federal Reserve: Current Policy and Conditions, by Marc Labonte.
16 In the IS-LM model that is often used to describe the relationship between public activity, private activity, and
market outcomes, a fiscal expansion can be thought of as causing an outward (right) shift in the IS curve.
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How Deficits and Debt Contribute to the Economy: Long-Run
Effects
In the long run, when economic output is affected by supply-side choices, the effect of
government borrowing on economic growth depends on how amounts borrowed are used relative
to what would have otherwise been done with those savings (i.e., an increase in private
investment or net exports) if such borrowing had not taken place. As shown in equation (3),
economic growth, or the change (Δ) in output (Y), is a function (f) of the stock of labor (L, or the
number of people working and hours that they work), the stock of capital (K, which includes
equipment, machines, and all other nonlabor factors), and the knowledge and technological
capability (A) that determines the productivity of labor and capital.
(3) ΔY= f(ΔL, ΔK, ΔA)
Assuming that the stock of labor is insensitive to fiscal policy choices, the effect of federal debt
on economic growth depends on how the additional government activity affects the capital stock
and productivity of labor and capital relative to what would have happened had amounts
borrowed been invested privately or increased net exports. If that government activity (debt-
financed spending) contributes to those factors more than the economic activity it replaced, than
that debt financing will have had a positive effect on future economic growth (or potential).
Alternatively, if such activity contributes less to those factors than the replaced private investment
and net exports, it will reduce long-term economic potential.
Changes in federal debt levels shift economic resources across time periods, a process sometimes
described as an intertemporal transfer. Federal debt issuances represent an increase in the current
level of federal resources and a decrease in future federal resources. Net interest payments, or the
total interest payments made by the federal government (to creditors) on borrowed money less
interest payments received (from individuals and institutions borrowing from the federal
government or debtors), may be thought of as the total expense associated with past federal
borrowing. Those resources cannot be allocated to other government services.
Total borrowing is constrained by the money available for investment (savings in dollars) at a
given point in time. This limit means that the amount of federal debt relative to output cannot
increase indefinitely. The trajectory of federal debt is therefore thought to be unsustainable if debt
taken as a share of output (measured in this report with gross domestic product, or GDP) rises
continuously in long-term projections. This happens when growth in the stock of debt outpaces
total economic growth, which can cause a variety of adverse outcomes, including reduced output,
increased unemployment, higher inflation, higher private interest rates, and currency
devaluation.17
Recent international experiences speak to the complexity of borrowing capacity. Both Greece and
Japan experienced rapid growth in government debt in the past decade. International Monetary
Fund data on general government debt (including municipal government debt) indicate that Greek
debt rose from 106% of GDP in 2002 to 178% of GDP in 2022, while Japanese debt rose from
154% of GDP to 264% of GDP over the same time period.18 A loss in market confidence in Greek
debt led to a severe recession in the middle of that period, with GDP contracting by 9 percentage
points in 2011 and long-term interest rates reaching 22% in 2012. Japanese borrowing was
17 For a more detailed discussion of the concept of “fiscal space” from a governing perspective, see Peter Heller, “Back
to Basics—Fiscal Space: What It Is and How to Get It,” Finance and Development, vol. 42, no. 2 (2005), International
Monetary Fund.
18 International Monetary Fund, “General government gross debt,” October 2022, available at https://www.imf.org/
external/datamapper/GGXWDG_NGDP@WEO/ADVEC/.
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viewed to be more sustainable despite being higher, with relatively flat GDP levels and long-term
interest rates close to zero in many years. Among the 41 countries considered to have “advanced
economies” by the IMF, the United States had the fifth-largest level of gross general government
debt (122% of GDP, including debt from state and local governments) in 2022.
How the Economy Contributes to Deficits
The deficit’s cyclical pattern can be attributed in part to “automatic stabilizers,” or spending
programs and tax provisions that cause the budget deficit to move in tandem with the business
cycle without any change in law. More robust economic periods generally produce lower net
deficits (or higher net surpluses), due to increases in receipts (from greater tax revenues) and
reduced expenditures (from decreased demand for public assistance). The opposite effect occurs
during recessions: as incomes and employment fall, the existing structure of the federal tax
system automatically collects less revenue, and spending on mandatory income security
programs, such as unemployment insurance, automatically rises. CBO estimated that automatic
stabilizers increased deficits in FY2020 and FY2021 by 1.6% of GDP and 1.3% of GDP,
respectively, shifts that were attributable to the economic effects of the COVID-19 crisis.19 The
estimated automatic stabilizer effect declined to an increase in the deficit of 0.1% of GDP in
FY2022, however, as economic conditions stabilized. CBO further projects similarly muted
automatic stabilizer effects in the economic forecast used in its May 2022 baseline, falling
between a 0.4% of GDP decrease and a 0.2% of GDP increase in every year from FY2023
through FY2032.
19 Congressional Budget Office, Automatic Stabilizers in the Budget: 2022 to 2032, October 2022, available at
https://www.cbo.gov/system/files/2022-10/58495-automatic-stabilizers.pdf.
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Figure 3. Economic and Federal Budget Outcomes, FY1973-FY2022
Source: Congressional Budget Office, Historical Budget Data; Bureau of Economic Analysis, National Income and
Product Accounts. CRS calculations.
Notes: Each dot represents the economic outcome (on the horizontal axis) and federal budget outcome (on the
vertical axis) for one fiscal year. The trend line of the entire sample is in blue.
Figure 3 shows the real economic growth (as a percentage on the horizontal axis) and the federal
budget outcome (as a percentage of GDP, on the vertical axis) in each fiscal year from FY1973
through FY2022. The positive correlation between economic outcomes and budget outcomes
shown through the general direction of the trend line from the lower left part of the graph to the
upper right area.
How the Economy Contributes to Debt
All else equal, higher levels of nominal GDP make a given amount of debt easier to repay by
eroding its real value. For example, the highest measurement of debt since 1940 occurred in 1946,
when the federal debt level was 119% of GDP, or $271 billion in (nominal) FY1946 dollars. In
contrast, $271 billion projects to equal 1.0% of GDP in FY2023.20 Increases in nominal GDP may
20 With positive economic growth, it is possible to simultaneously experience a year-over-year increase in nominal debt
and decrease in real debt. The federal government experienced this most recently from FY2000 to FY2001, when
nominal debt increased by $141 billion (from $5.629 trillion to $5.770 trillion), but real debt decreased by 0.9% of
GDP (from 55.5% to 54.6%).
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be caused by productivity increases, economic inflation—which measures the purchasing power
of currency—or a combination of each factor.21
Though changes in economic growth rates typically have a relatively small effect on real debt
levels in the short run, long-run changes in economic productivity can have a significant effect on
the trajectory and sustainability of the debt burden. For instance, from FY2009 through FY2018,
federal deficits averaged 5.3% of GDP, and real economic growth averaged 1.76% per year over
the same period; those factors combined to increase federal publicly held debt from 39% of GDP
at the beginning of FY2008 to 78% of GDP at the end of FY2018.22 Though real deficits were
actually larger from FY1943 to FY1952 (averaging 7.3% of GDP), robust real economic growth
over that period (3.6% per year) meant that the change in publicly held debt in that decade was
smaller (45% of GDP to 60% to GDP) than in the FY2009-FY2018 period.
Deficit and Debt Outlook
The FY2023 deficit is projected to equal 3.8% of GDP, which would be slightly higher than the
average federal deficit from FY1973 to FY2022 (3.6% of GDP). Both real deficits and real debt
are projected to increase over the course of the 10-year budget window, which runs through
FY2032. In its latest economic forecast, CBO projected that the total burden of U.S. debt held by
the public would steadily increase over the course of the budget window, from 96% of GDP in
FY2023 to 110% of GDP in FY2032.23
Table 2 shows CBO’s most recent forecasts for publicly held debt. Each forecast projects an
increase in publicly held debt over the next 5, 10, and 25 fiscal years.
Table 2. Recent CBO Forecasts of Federal Debt Held by the Public
(all figures expressed as a percentage of GDP)
Projection FY2023 FY2032 FY2052
Current Law Baseline
96%
110%
n/a
Baseline with Accelerated Discretionary Spending, Extension of Expiring Tax
96%
122%
n/a
Provisions in 2017 Tax Act (P.L. 115-97)
Baseline with Frozen Nominal Discretionary Spending
96%
102%
n/a
CBO Long-Term Baseline
96%
110%
185%
Source: CBO, The Budget and Economic Outlook: 2022 to 2032, May 2022; and CBO, The 2022 Long-Term Budget
Outlook, July 2022. CRS calculations.
Notes: All baselines operate largely on a current law basis unless otherwise noted. Accelerated discretionary
spending assumes discretionary spending growth that matches that of nominal GDP; frozen nominal
discretionary spending assumption holds nominal discretionary spending constant (leading to declining real
discretionary spending with positive inflation).
The CBO baseline assumes that current law continues as scheduled. Specifically, the CBO
baseline assumes that certain tax policy changes enacted in the 2017 tax revision (P.L. 115-97)
21 Because real GDP measures adjust for the effects of inflation, average nominal GDP growth exceeds measures of
real GDP growth with positive long-run inflation.
22 Changes in real debt over time are also influenced by the stock of real debt at the beginning of the period, with larger
amounts of real debt leading to smaller net increases in the debt stock from a given combination of deficits and
economic growth.
23 Congressional Budget Office, An Update to the Budget and Economic Outlook: 2022 to 2032, May 2022.
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and in other laws will expire as scheduled under current law, and that real discretionary spending
will remain roughly at FY2022 levels.24 CBO also provides alternative projections where such
assumptions are revised. If tax reductions in the 2017 tax revision were extended, CBO projects
that federal debt held by the public would increase to 122% of GDP by FY2032. Alternatively,
CBO projects that if discretionary spending were to be nominally frozen, or held at FY2022
nominal levels (leading to declining real discretionary spending over the baseline window with
positive inflation), federal debt held by the public would equal 102% of GDP at the end of
FY2032.
CBO also produces a long-term baseline that uses a number of additional assumptions to extend
its standard baseline an additional 20 years (thus the 2022 long-term baseline runs through
FY2052). The current long-term forecast projects that publicly held federal debt will equal 185%
of GDP in FY2052, which would easily exceed the highest stock of federal debt experienced in
the FY1940-FY2022 period (106% of GDP in FY1946).
CBO projects increases in both net interest payments and publicly held federal debt over the next
10 years, leading to a significant rise in U.S. net interest payments. As noted above, CBO projects
that publicly held federal debt will rise from 96% of GDP in FY2023 to 110% of GDP in
FY2032, and projects federal net interest payments of 3.3% of GDP in FY2032, which would be
the highest real amount devoted to net interest since FY1940 (3.2% of GDP in FY1991).
Addressing the potential consequences of long-term federal debt projections will likely involve
policy adjustments that reduce future budget deficits, through either tax increases, reductions in
spending, or a combination of the two. Under CBO’s extended baseline, maintaining the debt-to-
GDP ratio at roughly the current level (100%) in FY2052 would require a permanent cut in
noninterest spending, increase in revenues, or some combination of the two in the amount of
2.8% of GDP (or about $800 billion in FY2027 alone) in each year from FY2027 to FY2052.
Maintaining this debt-to-GDP ratio beyond FY2052 would require additional deficit reduction.25
International Context
It may be useful to compare the recent U.S. federal borrowing trajectory with the practices of
international governments, as future interest rate and fiscal space considerations will both be
affected by the behavior of other major actors. Table 3 includes the general government debt for
Group of Seven (G7) countries from 2002 to 2022.26
Table 3. IMF General Gross Debt for G7 Countries, 2002-2022
(as a percentage of GDP; change from preceding column in parentheses)
Country
2002
2007
2012
2017
2022
United States
56%
65% (+9)
103% (+38)
106% (+3)
122% (+16)
Canada
80%
67% (-14)
85% (+18)
89% (+4)
102% (+13)
24 The 2017 tax revision included a number of reductions to individual income tax rates and tax expenditures that are
scheduled to expire under current law. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), passed as
part of the Consolidated Appropriations Act, 2016 (P.L. 114-113), modified most of the previously expired tax
provisions that had been extended several times by past Congresses. The PATH Act made many of those provisions
permanent, while others were extended through the 2016 or 2019 tax year. Provisions that were not made permanent
are assumed to expire as scheduled under the CBO baseline.
25 Congressional Budget Office, The 2022 Long-Term Budget Outlook, July 2022.
26 General government debt includes both federal and municipal (state and local) debt, and IMF projections typically
adhere closely to current policy baseline assumptions.
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France
60%
65% (+5)
91% (+26)
98% (+7)
112% (+14)
Germany
60%
64% (+4)
81% (+17)
65% (-16)
71% (+6)
Italy
106%
104% (-2)
127% (+23)
134% (+7)
147% (+13)
Japan
154%
173% (+19)
226% (+53)
231% (+5)
264% (+33)
United Kingdom
34%
41% (+7)
83% (+42)
85% (+2)
87% (+2)
All G7
77%
81% (+4)
121% (+40)
117% (-4)
128% (+11)
Countries
Source: International Monetary Fund, World Economic Outlook, October 2022.
Notes: General gross debt includes debt held by municipal governments and includes only publicly held debt.
Increases from preceding period colored red; decreases from preceding period colored green.
Table 3 highlights the effect of economic recessions on general government debt, with large G7
debt increases immediately following the Great Recession (a 40% increase from 2007 to 2012)
and the COVID-19 pandemic (an 11% increase from 2017 to 2022). Changes in total G7 debt
cumulatively offset in other periods, with a 4% increase from 2002 to 2007 and a 4% decrease
from 2012 to 2017 (inclusive of a relatively large decline in German debt during that period).
Relative to the general G7 experience, the United States experienced a similar increase in general
gross debt following recessions (a 54% increase in debt for the United States versus a 51%
change for G7). The increase in U.S. general gross debt in other periods (12% cumulative
increase in 2002-2007 and 2012-2017), however, differed from the flat trajectory of all G7
general gross debt.
Author Information
Grant A. Driessen
Specialist in Public Finance
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
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its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
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copy or otherwise use copyrighted material.
Congressional Research Service
R44383 · VERSION 7 · UPDATED
13
December 20, 2022
An Introduction
Grant A. Driessen
The federal government incurs a budget deficit when its total outgoing payments (outlays) exceed
Specialist in Public Finance
the total money it collects (revenues). If instead federal revenues are greater than outlays, then
the federal government generates a surplus. Deficits are measured over the course of a defined
period of time—in the case of the federal government, a fiscal year.
Debt measurements may be taken at any point in time, and represent the accumulation of all previous government borrowing
activity from private citizens, institutions, foreign governments, and other parts of the federal government. Federal debt
increases when there are net budget deficits and outflows made for federal credit programs, which combine to represent debt
held by the public—the debt measure of primary interest to budget and financial observers. Federal debt also rises through
increases in intragovernmental debt, which is generated by trust fund surpluses that are used to finance other government
activity. Federal debt declines when there are budget surpluses, a reduction in the federal credit portfolio, or decreases in
intragovernmental borrowing.
Federal deficit and debt outcomes are interdependent: budget deficits increase federal debt levels, which in turn increase
future net deficits. The nature of the relationship between deficits and debt varies depending on the type of debt considered.
Budget deficits are the principal contributor to debt held by the public. The effect of deficits on intragovernmental debt is less
certain than their contribution to debt held by the public. All else equal, increases in net trust fund deficits will lead to
increases in total budget deficits but decreases in intragovernmental debt.
Interest payments made on publicly held debt instruments contribute directly to federal deficits. Holders of federal debt are
compensated by receiving interest payments from Treasury. Intragovernmental debt does not contribute to future deficits.
Persistent budget deficits and a large and increasing federal debt have generated discussions over the long-term sustainability
of current budget projections. The historic economic shocks of the Great Recession and COVID-19 pandemic and ensuing
federal responses generated the five largest real federal deficits (measured as a share of total output) since World War II.
Publicly held debt is projected to be 96% of GDP at the end of FY2023, roughly triple the value recorded at the end of
FY2001 (32% of GDP). Budget forecasts project rising deficits and accelerated increases in publicly held debt in ensuing
decades.
Over time, persistent budget deficits can hamper economic growth. Deficits represent an intertemporal transfer from later
generations to the current one, as money borrowed now will eventually require repayment with interest. The effect of deficit
financing on economic output depends on the nature of the government activity being financed and the private activity that
would have otherwise taken place.
Federal debt is constrained by the willingness of investors to finance borrowing. While the amount of federal borrowing
investors will finance may be affected by economic growth and other factors, real federal debt cannot increase indefinitely.
There are no signs that federal borrowing capacity will be exhausted in the short term. However, the consequences of
exhausted fiscal space may be worth considering when examining the medium- and long-term trajectory of the federal
budget.
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Contents
Introduction ..................................................................................................................................... 1
Background ..................................................................................................................................... 1
What Is a Deficit? ...................................................................................................................... 1
What Is the Debt? ...................................................................................................................... 2
Comparing Debt Held by the Public and Intragovernmental Debt ..................................... 2
Deficit and Debt Interaction ............................................................................................................ 3
How Deficits Contribute to Debt .............................................................................................. 4
How Debt Contributes to Deficits ............................................................................................. 5
Economic Theory, Deficits, and Debt: In Brief ............................................................................... 6
How Deficits and Debt Contribute to the Economy: Short-Run Effects ................................... 6
How Deficits and Debt Contribute to the Economy: Long-Run Effects ................................... 8
How the Economy Contributes to Deficits ............................................................................... 9
How the Economy Contributes to Debt .................................................................................. 10
Deficit and Debt Outlook ............................................................................................................... 11
International Context ............................................................................................................... 12
Figures
Figure 1. Federal Debt, FY1973-FY2022 ....................................................................................... 4
Figure 2. Total and Primary Federal Budget Outcomes, FY1973-FY2022 ..................................... 6
Figure 3. Economic and Federal Budget Outcomes, FY1973-FY2022 ......................................... 10
Tables
Table 1. Features of Debt Held by the Public and Intragovernmental Debt .................................... 3
Table 2. Recent CBO Forecasts of Federal Debt Held by the Public ............................................. 11
Table 3. IMF General Gross Debt for G7 Countries, 2002-2022 .................................................. 12
Contacts
Author Information ........................................................................................................................ 13
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Deficits, Debt, and the Economy: An Introduction
Introduction
Persistent annual budget deficits and a large and increasing federal debt have generated
discussions over the long-term sustainability of current budget projections. The Great Recession
and COVID-19 pandemic and ensuing federal responses generated the five largest real federal
deficits (measured as a share of gross domestic product, or GDP) since World War II. Publicly
held debt is projected to be 96% of GDP at the end of FY2023, roughly triple the value recorded
at the end of FY2001 (32% of GDP). Budget forecasts project rising deficits and accelerated
increases in publicly held debt in ensuing decades. This report explores distinctions in the concept
and composition of deficits and debt and explains how they interact with economic conditions
and other aspects of fiscal policy.
Background
What Is a Deficit?
A deficit describes one of the three possible outcomes for the federal budget.1 The federal
government incurs a deficit (also known as a net deficit) when its total outgoing payments
(outlays) exceed the total money it collects (revenues). If instead federal revenues are greater than
outlays, then the federal government generates a surplus. A balanced budget describes the case
where federal receipts equal federal expenditures.2 The size of a deficit or surplus is equal to the
difference between the levels of spending and receipts. Deficits are measured over the course of a
defined period of time—in the case of the federal government, a fiscal year.3
Federal budget outcomes incorporate both “on-budget” activities, which represent the majority of
federal taxes and spending, and “off-budget” government activities, which include revenues and
outlays from Social Security trust funds and the Postal Service. For federal credit programs, the
subsidy cost of government activities is included in deficit and surplus calculations.4 The federal
budget is constructed in a manner that provides for lower net deficits in more robust economic
conditions, attributable to higher revenues (from taxes on increased output) and, to a smaller
degree, lower spending levels (from reduced demand for programs like unemployment
insurance).
The Congressional Budget Office (CBO) projects that the federal government will record a deficit
of $984 billion in FY2023, equivalent to 3.8% of GDP. From FY1973 to FY2022, the average net
deficit equaled 3.6% of annual GDP ($942 billion in FY2023 dollars). Over the FY1973-FY2022
1 Unlike many state and local governments, the federal government has no statutory balanced-budget requirement.
2 For a more thorough discussion of budget concepts, see Office of Management and Budget, FY 2023 Budget:
Analytical Perspectives, February 2023.
3 As compared to the calendar year, the federal fiscal year runs from October of the previous year through September of
the current year. For example, FY2023 began on October 1, 2022, and will end on September 30, 2023.
4 The Federal Credit Reform Act of 1992 (P.L. 101-58) defines subsidy costs as “the estimated long-term cost to the
government of a loan guarantee, calculated on a net present value basis, excluding administrative costs.” Subsidy costs
therefore represent a projection of the final cost to the government of a credit program, and not the inflow or outflow of
money for the activity. For more information about subsidy costs and their effect on the federal budget, see CRS Report
R44193, Federal Credit Programs: Comparing Fair Value and the Federal Credit Reform Act (FCRA), by Raj
Gnanarajah.
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period, the government generated a surplus on four occasions—in each year from FY1998
through FY2001. In all other years, the federal government incurred a net deficit.5
What Is the Debt?
The federal debt is the money that the government owes to its creditors, which include private
citizens, institutions, foreign governments, and other parts of the federal government. Debt
measurements may be taken at any time and represent the accumulation of all previous
government borrowing activity. Federal debt increases when there are net budget deficits,
outflows made for federal credit programs (net of the subsidy costs already included in deficit
calculations), and increases in intragovernmental borrowing. Federal credit programs include
loans issued for college tuition payments, small business programs, and other activities the
government may seek to support.6 In those cases, debt levels increase as additional loans are
granted and decrease as money for such programs is repaid.
Intragovernmental debt is generated when trust funds, revolving funds, and special funds receive
money from tax payments, fees, or other revenue sources that is not immediately needed to make
payments. In those cases the surpluses are used to finance other government activities, and
Government Account Series (GAS) securities are issued to the trust fund. GAS securities may
then be redeemed when trust fund expenditures exceed revenue levels. Intragovernmental debt
may be thought of as money that one part of the government owes another part.
The Department of the Treasury is responsible for managing federal debt. The primary objective
of Treasury’s debt management strategy is to fulfill the government’s borrowing needs at the
lowest cost over time.7 Treasury finances federal borrowing activities by issuing government-
backed securities that generate interest payments for their owners. Treasury securities are
typically sold to the public through an auction process, and have maturity periods (the length of
time that they are held before repayment) of anywhere from several weeks to 30 years.8
Comparing Debt Held by the Public and Intragovernmental Debt
Federal debt may be divided into two major categories: (1) debt held by the public, which is the
sum of accrued net deficits and outstanding money from federal credit programs; and (2)
intragovernmental debt. As of September 30, 2022, the amount of federal debt outstanding was
$30.929 trillion, with 78.6% of that debt held by the public and 21.4% held as intragovernmental
debt.9 Table 1 summarizes the composition of debt held by the public and intragovernmental
debt.
5 Office of Management and Budget, Fiscal Year 2023 Historical Tables, Table 1.1, at https://www.whitehouse.gov/
sites/default/files/omb/budget/fy2023/assets/hist.pdf.
6 For more information about the accounting methods used in deficit and debt calculations, see CRS Report R43811,
Cash Versus Accrual Basis of Accounting: An Introduction, by Raj Gnanarajah; and CRS Report R44002, Cash Versus
Accrual Accounting: Tax Policy Considerations, by Raj Gnanarajah and Mark P. Keightley.
7 U.S. Department of the Treasury, Duties & Functions of the U.S. Department of the Treasury, at
http://www.treasury.gov/about/role-of-treasury/.
8 For more information about Treasury’s debt management practices, see CRS Report R40767, How Treasury Issues
Debt, by Grant A. Driessen.
9 Unless otherwise noted, federal debt totals are taken from U.S. Treasury, “Monthly Statement of the Public Debt,
September 2022,” at https://fiscaldata.treasury.gov/datasets/monthly-statement-public-debt/summary-of-treasury-
securities-outstanding.
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Table 1. Features of Debt Held by the Public and Intragovernmental Debt
Publicly Held Debt
Intragovernmental Debt
Origin
Budget deficits and the federal loan
Federal trust fund surpluses
portfolio
Ownership
Individuals and institutions
(domestic and foreign); state and
Federal government accounts
local governments; foreign
governments
Debt outstanding
$24.3 tril ion (79% of all debt)
$6.6 tril ion (21% of all debt)
Share of marketable securities
97%
0.3%
Financial market presence
Debt issuances may compete for
Debt issuances do not appear in
private assets exchanged in the
public markets and thus do not
financial market
compete for private assets
Source: U.S. Treasury, Monthly Statement of the Public Debt, September 2022, at https://fiscaldata.treasury.gov/
datasets/monthly-statement-public-debt/summary-of-treasury-securities-outstanding.
Note: Debt values as of September 30, 2022.
Individuals, firms, the Federal Reserve, state and local governments, and foreign governments are
all eligible to purchase publicly held debt. Debt may be acquired directly through the auction
process, from which most publicly held debt is initially sold, or on the secondary market if the
debt is deemed “marketable” or eligible for resale.10 The total amount of publicly held debt
outstanding was $24.3 trillion as of September 30, 2022.
The majority of publicly held debt is marketable, and includes all Treasury Notes, Bonds, Bills,
Treasury Inflation Protected Securities (TIPS), and Floating Rate Notes (FRNs) issued by
Treasury. Nonmarketable debt held by the public is composed of U.S. Savings Bonds, State and
Local Government Securities (SLGS), and other, smaller issues. As of September 30, 2022, 97%
of publicly held issues, or $23.7 trillion, was marketable.
Intragovernmental debt is debt where the federal government is both the creditor and the
borrower. Intragovernmental debt issuances are almost exclusively nonmarketable, as marketable
debt comprised only $0.02 trillion (0.3%) of the $6.6 trillion in total intragovernmental debt on
September 30, 2022. The majority of nonmarketable intragovernmental debt was held by trust
funds devoted to Social Security and military and federal worker retirement. Marketable
intragovernmental debt is composed primarily of debt held by the Federal Financing Bank, which
is a government corporation created to reduce the cost of federal borrowing.
Since intragovernmental debt is held only in government accounts, such debt cannot be accessed
by institutions outside the federal government. Conversely, the bonds that finance publicly held
debt activity may compete for assets in private and financial markets. Public debt issues may be a
particularly attractive collateral option on the secondary market if the federal government is
perceived as a safe credit risk.
Deficit and Debt Interaction
Federal deficit and debt outcomes are interdependent; budget deficits increase federal debt levels,
which in turn increase future net deficits because of the need to service higher interest payments
10 The Banking Act of 1935 (P.L. 74-305) prohibited the Federal Reserve from purchasing Treasury securities directly
(at auction). The Federal Reserve may purchase Treasury securities on the secondary market.
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on the nation’s debt. The nature of the relationship between deficits and debt varies depending on
the type of debt considered. This section describes the relationship between federal deficits and
debt.
How Deficits Contribute to Debt
Budget deficits are the principal contributor to debt held by the public. To finance budget deficits,
Treasury sells debt instruments. The value of those debt holdings (which include interest
payments) represents the vast majority of publicly held debt. From FY1973 to FY2022, annual
nominal budget deficits and surpluses of the federal government summed to $22.0 trillion; over
the same period, total debt held by the public increased by $24.0 trillion.11 Publicly held debt has
been the biggest determinant of historical changes in the total stock of federal debt. Figure 1
shows changes in federal debt levels from FY1973 through FY2022. Though there has been a
gradual increase in intragovernmental debt in recent decades, the decline in real debt following
World War II and subsequent increase in debt levels beginning in the late 1970s were each caused
primarily by similar changes in the stock of publicly held debt over those time periods.
Figure 1. Federal Debt, FY1973-FY2022
(as a % of GDP)
Source: Congressional Budget Office.
11 Congressional Budget Office, Historical Budget Data, May 2022, at https://www.cbo.gov/about/products/budget;
Congressional Budget Office, Monthly Budget Review, September 2022, at https://www.cbo.gov/about/products/
budget; and .S. Treasury, “Monthly Statement of the Public Debt, September 2022,” at https://fiscaldata.treasury.gov/
datasets/monthly-statement-public-debt/summary-of-treasury-securities-outstanding.
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How Debt Contributes to Deficits
Present borrowing outcomes affect future budgeting outcomes. Publicly held debt contributes
directly to federal deficits through interest payments on debt issuances. Interest payments are
made to both debt held by the public and intragovernmental debt. As the government serves as
buyer and seller of intragovernmental debt, interest payments on those holdings do not affect the
federal budget deficit.12 However, interest payments made on publicly held debt represent new
federal spending, and are recorded in the budget as outlays when payments are made. The
government incurs interest costs when it opts to finance spending through borrowing rather than
through increased revenues. Net interest payments represent the amount paid from the
government to debt holders in a given time period, less interest payments received for federal
loan programs.13
For investors, purchasing a debt issuance represents both a loss of liquidity relative to currency
holdings (money paid for the debt holding can be used immediately, while the debt issuance may
only be resold on the secondary market or held until the date of maturity) and an opportunity cost
(the money used for the purchase could have been spent on other items, invested elsewhere, or
saved). Debt holders are compensated for those costs by receiving interest payments from
Treasury on their issuances.
Determinants of Net Interest Payments
The amount of net interest payments owed by the federal government depends on the existing stock of federal
debt and the interest rate on outstanding debt instruments. The structure of the interest payments may be fixed
or variable, depending on the type of debt issuance. In either case, the terms of interest are agreed to in advance
of sale. Interest rates on debt vehicles are largely determined by prevailing economic conditions. Situations where
the private cost of borrowing (interest rate) is high wil raise interest rates on federal debt and thereby increase
net interest payments. Increases in the amount of existing debt wil also lead to a rise in net interest payments, as
they increase the base on which a given interest rate is applied.
From FY1973 to FY2022 net interest payments averaged 2.0% of annual GDP, equivalent to
about $534 billion annually in 2023 dollars. High interest rates and increasing debt levels caused
the net interest burden to peak in the 1980s and 1990s. Recent net interest payments have been
lower than their long-term averages; in FY2023 net interest payments are projected to be $442
billion, or 1.7% of GDP. Recent net interest payments were the product of sustained low interest
rates and relatively high levels of real debt. Unless the federal debt is reduced, net interest
payments will increase if the recent shift away from a low interest rate environment persists. In its
most recent forecast, the Congressional Budget Office (CBO) projects that real net interest
payments will increase to 3.3% of GDP by FY2032.14
One way to measure the effect of debt on future deficits is to examine the relationship between
total federal deficits and the primary deficit, which measures the balance of revenues and
expenditures with net interest payments excluded. Figure 2 shows total and primary budget
12 Although intragovernmental debt does not affect net interest payments, shifts in certain types of intragovernmental
debt may serve as a signal of future budgetary challenges. A notable example of such signaling may be seen with the
increases in intragovernmental debt held by trust funds devoted to Social Security. Intragovernmental debt from those
funds began increasing in the 1980s, as the entry of the “Baby Boomer” generation into the workforce increased
payments into the Social Security system, and produced surpluses in Social Security trust funds. All else equal, the
eventual retirement of those same workers has led to payments from Social Security trust funds exceeding revenues,
thereby drawing down from excess funds in those accounts.
13 The combined interest paid on debt held by the public and intragovernmental debt is known as gross interest
payments.
14 Congressional Budget Office, The Budget and Economic Outlook: 2022 to 2032, May 2022.
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outcomes from FY1973 through FY2022. The gap between the total and primary outcomes in a
given year is explained by net interest payments. The primary deficit averaged 1.6% of GDP from
FY1973 to FY2022, as compared to the average total budget deficit of 3.6% of GDP recorded
over the same time period. While the federal government recorded a budget surplus four times
from FY1973 to FY2022, in eight other years it registered a primary surplus, most recently in
2007.
Figure 2. Total and Primary Federal Budget Outcomes, FY1973-FY2022
(as a % of GDP)
Source: Congressional Budget Office; CRS calculations.
Economic Theory, Deficits, and Debt: In Brief
This section provides a primer of how government deficits and debt are integrated into the larger
economy in both the short and long run, and provides some ways to measure such interactions.
The nature of interaction between fiscal outcomes and economic performance may have
ramifications for how Congress wishes to distribute its activity both within a recession or
expansion and for what fiscal targets it wishes to set in the long run.
How Deficits and Debt Contribute to the Economy: Short-Run
Effects
In the short run, when economic output is assumed to be fixed, output is a function of both private
and public activity. Equation (1), also known as the national accounting identity, shows the
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Deficits, Debt, and the Economy: An Introduction
different choices that can be made with all economic output in a given time period. It states that
output (Y) in a given economy is equal to the sum of private consumption (C), private investment
(I), net government investment (G), and net exports (X). Put another way, equation (1) asserts that
output is the sum of private consumption, private saving, and net government activity. The net
government deficit, or G, is shown in equation (2) as spending (S) less revenues (R). Absent a
monetary policy intervention by the Federal Reserve (which makes monetary decisions
independently), G must be obtained through government borrowing, or debt.15
(1) Y = C + I + G + X
(2) G = S - R
Since the levels of output (Y) and consumption (C) in a given time period are fixed, increases in
government investment (G) will reduce private investment (I), net exports (X), or some
combination thereof. Government borrowing increases that reduce private investment are
commonly categorized as “crowding out,” and represent a shift from private investment to public
investment.
Increased government borrowing that reduces net exports (generated by borrowing from foreign
sources) represents an expansion of the short-term money supply, as money is being brought into
the economy now at the expense of the future stock of money (as foreign borrowing is repaid).
Such a fiscal expansion increases the quantity of money demanded, which drives up interest rates
(or cost of borrowing).16
The federal government may choose to generate short-run budget deficits for a few reasons.
Deficit financing, or payment for federal government activity at least partly through debt
increases, increases the total level of spending in the economy. Most economists believe that the
implementation of deficit financing can be used to generate a short-term stimulus effect, either for
a particular industry or for the entire economy. In this view, increases in expenditures and tax
reductions can be used to generate employment opportunities and consumer spending and reduce
the intensity of stagnant economic periods.
Deficit financing is a less effective countercyclical strategy when it leads to “crowding out,” or
when government financing merely replaces private-sector funding instead of inducing new
economic activity, and is more likely to occur in periods of robust economic growth. Deficit
reduction when the economy is operating near or at full potential can help prevent the economy
from overheating and avoid “crowding out” of private investment, which could have positive
implications for intergenerational equity and long-term growth.
Deficit financing may also be used as part of a structurally balanced budget strategy, which alters
government tax and spending levels to smooth the effect of business cycles. Smoothing budgetary
changes may reduce the economic shocks deficits induce among businesses and households.
Governments may also use federal deficits or surpluses to spread the payment burden of long-
term projects across generations. This sort of intergenerational redistribution is one justification
for the creation of long-run trust funds, such as those devoted to Social Security.
15 This report does not analyze interactions among monetary policy, federal debt, and economic outcomes. Federal
monetary policy is generally delegated to the Federal Reserve. For more on monetary policy issues, see CRS Report
RL30354, Monetary Policy and the Federal Reserve: Current Policy and Conditions, by Marc Labonte.
16 In the IS-LM model that is often used to describe the relationship between public activity, private activity, and
market outcomes, a fiscal expansion can be thought of as causing an outward (right) shift in the IS curve.
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Deficits, Debt, and the Economy: An Introduction
How Deficits and Debt Contribute to the Economy: Long-Run
Effects
In the long run, when economic output is affected by supply-side choices, the effect of
government borrowing on economic growth depends on how amounts borrowed are used relative
to what would have otherwise been done with those savings (i.e., an increase in private
investment or net exports) if such borrowing had not taken place. As shown in equation (3),
economic growth, or the change (Δ) in output (Y), is a function (f) of the stock of labor (L, or the
number of people working and hours that they work), the stock of capital (K, which includes
equipment, machines, and all other nonlabor factors), and the knowledge and technological
capability (A) that determines the productivity of labor and capital.
(3) ΔY= f(ΔL, ΔK, ΔA)
Assuming that the stock of labor is insensitive to fiscal policy choices, the effect of federal debt
on economic growth depends on how the additional government activity affects the capital stock
and productivity of labor and capital relative to what would have happened had amounts
borrowed been invested privately or increased net exports. If that government activity (debt-
financed spending) contributes to those factors more than the economic activity it replaced, than
that debt financing will have had a positive effect on future economic growth (or potential).
Alternatively, if such activity contributes less to those factors than the replaced private investment
and net exports, it will reduce long-term economic potential.
Changes in federal debt levels shift economic resources across time periods, a process sometimes
described as an intertemporal transfer. Federal debt issuances represent an increase in the current
level of federal resources and a decrease in future federal resources. Net interest payments, or the
total interest payments made by the federal government (to creditors) on borrowed money less
interest payments received (from individuals and institutions borrowing from the federal
government or debtors), may be thought of as the total expense associated with past federal
borrowing. Those resources cannot be allocated to other government services.
Total borrowing is constrained by the money available for investment (savings in dollars) at a
given point in time. This limit means that the amount of federal debt relative to output cannot
increase indefinitely. The trajectory of federal debt is therefore thought to be unsustainable if debt
taken as a share of output (measured in this report with gross domestic product, or GDP) rises
continuously in long-term projections. This happens when growth in the stock of debt outpaces
total economic growth, which can cause a variety of adverse outcomes, including reduced output,
increased unemployment, higher inflation, higher private interest rates, and currency
devaluation.17
Recent international experiences speak to the complexity of borrowing capacity. Both Greece and
Japan experienced rapid growth in government debt in the past decade. International Monetary
Fund data on general government debt (including municipal government debt) indicate that Greek
debt rose from 106% of GDP in 2002 to 178% of GDP in 2022, while Japanese debt rose from
154% of GDP to 264% of GDP over the same time period.18 A loss in market confidence in Greek
debt led to a severe recession in the middle of that period, with GDP contracting by 9 percentage
points in 2011 and long-term interest rates reaching 22% in 2012. Japanese borrowing was
17 For a more detailed discussion of the concept of “fiscal space” from a governing perspective, see Peter Heller, “Back
to Basics—Fiscal Space: What It Is and How to Get It,” Finance and Development, vol. 42, no. 2 (2005), International
Monetary Fund.
18 International Monetary Fund, “General government gross debt,” October 2022, available at https://www.imf.org/
external/datamapper/GGXWDG_NGDP@WEO/ADVEC/.
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Deficits, Debt, and the Economy: An Introduction
viewed to be more sustainable despite being higher, with relatively flat GDP levels and long-term
interest rates close to zero in many years. Among the 41 countries considered to have “advanced
economies” by the IMF, the United States had the fifth-largest level of gross general government
debt (122% of GDP, including debt from state and local governments) in 2022.
How the Economy Contributes to Deficits
The deficit’s cyclical pattern can be attributed in part to “automatic stabilizers,” or spending
programs and tax provisions that cause the budget deficit to move in tandem with the business
cycle without any change in law. More robust economic periods generally produce lower net
deficits (or higher net surpluses), due to increases in receipts (from greater tax revenues) and
reduced expenditures (from decreased demand for public assistance). The opposite effect occurs
during recessions: as incomes and employment fall, the existing structure of the federal tax
system automatically collects less revenue, and spending on mandatory income security
programs, such as unemployment insurance, automatically rises. CBO estimated that automatic
stabilizers increased deficits in FY2020 and FY2021 by 1.6% of GDP and 1.3% of GDP,
respectively, shifts that were attributable to the economic effects of the COVID-19 crisis.19 The
estimated automatic stabilizer effect declined to an increase in the deficit of 0.1% of GDP in
FY2022, however, as economic conditions stabilized. CBO further projects similarly muted
automatic stabilizer effects in the economic forecast used in its May 2022 baseline, falling
between a 0.4% of GDP decrease and a 0.2% of GDP increase in every year from FY2023
through FY2032.
19 Congressional Budget Office, Automatic Stabilizers in the Budget: 2022 to 2032, October 2022, available at
https://www.cbo.gov/system/files/2022-10/58495-automatic-stabilizers.pdf.
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Deficits, Debt, and the Economy: An Introduction
Figure 3. Economic and Federal Budget Outcomes, FY1973-FY2022
Source: Congressional Budget Office, Historical Budget Data; Bureau of Economic Analysis, National Income and
Product Accounts. CRS calculations.
Notes: Each dot represents the economic outcome (on the horizontal axis) and federal budget outcome (on the
vertical axis) for one fiscal year. The trend line of the entire sample is in blue.
Figure 3 shows the real economic growth (as a percentage on the horizontal axis) and the federal
budget outcome (as a percentage of GDP, on the vertical axis) in each fiscal year from FY1973
through FY2022. The positive correlation between economic outcomes and budget outcomes
shown through the general direction of the trend line from the lower left part of the graph to the
upper right area.
How the Economy Contributes to Debt
All else equal, higher levels of nominal GDP make a given amount of debt easier to repay by
eroding its real value. For example, the highest measurement of debt since 1940 occurred in 1946,
when the federal debt level was 119% of GDP, or $271 billion in (nominal) FY1946 dollars. In
contrast, $271 billion projects to equal 1.0% of GDP in FY2023.20 Increases in nominal GDP may
20 With positive economic growth, it is possible to simultaneously experience a year-over-year increase in nominal debt
and decrease in real debt. The federal government experienced this most recently from FY2000 to FY2001, when
nominal debt increased by $141 billion (from $5.629 trillion to $5.770 trillion), but real debt decreased by 0.9% of
GDP (from 55.5% to 54.6%).
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be caused by productivity increases, economic inflation—which measures the purchasing power
of currency—or a combination of each factor.21
Though changes in economic growth rates typically have a relatively small effect on real debt
levels in the short run, long-run changes in economic productivity can have a significant effect on
the trajectory and sustainability of the debt burden. For instance, from FY2009 through FY2018,
federal deficits averaged 5.3% of GDP, and real economic growth averaged 1.76% per year over
the same period; those factors combined to increase federal publicly held debt from 39% of GDP
at the beginning of FY2008 to 78% of GDP at the end of FY2018.22 Though real deficits were
actually larger from FY1943 to FY1952 (averaging 7.3% of GDP), robust real economic growth
over that period (3.6% per year) meant that the change in publicly held debt in that decade was
smaller (45% of GDP to 60% to GDP) than in the FY2009-FY2018 period.
Deficit and Debt Outlook
The FY2023 deficit is projected to equal 3.8% of GDP, which would be slightly higher than the
average federal deficit from FY1973 to FY2022 (3.6% of GDP). Both real deficits and real debt
are projected to increase over the course of the 10-year budget window, which runs through
FY2032. In its latest economic forecast, CBO projected that the total burden of U.S. debt held by
the public would steadily increase over the course of the budget window, from 96% of GDP in
FY2023 to 110% of GDP in FY2032.23
Table 2 shows CBO’s most recent forecasts for publicly held debt. Each forecast projects an
increase in publicly held debt over the next 5, 10, and 25 fiscal years.
Table 2. Recent CBO Forecasts of Federal Debt Held by the Public
(all figures expressed as a percentage of GDP)
Projection FY2023 FY2032 FY2052
Current Law Baseline
96%
110%
n/a
Baseline with Accelerated Discretionary Spending, Extension of Expiring Tax
96%
122%
n/a
Provisions in 2017 Tax Act (P.L. 115-97)
Baseline with Frozen Nominal Discretionary Spending
96%
102%
n/a
CBO Long-Term Baseline
96%
110%
185%
Source: CBO, The Budget and Economic Outlook: 2022 to 2032, May 2022; and CBO, The 2022 Long-Term Budget
Outlook, July 2022. CRS calculations.
Notes: All baselines operate largely on a current law basis unless otherwise noted. Accelerated discretionary
spending assumes discretionary spending growth that matches that of nominal GDP; frozen nominal
discretionary spending assumption holds nominal discretionary spending constant (leading to declining real
discretionary spending with positive inflation).
The CBO baseline assumes that current law continues as scheduled. Specifically, the CBO
baseline assumes that certain tax policy changes enacted in the 2017 tax revision (P.L. 115-97)
21 Because real GDP measures adjust for the effects of inflation, average nominal GDP growth exceeds measures of
real GDP growth with positive long-run inflation.
22 Changes in real debt over time are also influenced by the stock of real debt at the beginning of the period, with larger
amounts of real debt leading to smaller net increases in the debt stock from a given combination of deficits and
economic growth.
23 Congressional Budget Office, An Update to the Budget and Economic Outlook: 2022 to 2032, May 2022.
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and in other laws will expire as scheduled under current law, and that real discretionary spending
will remain roughly at FY2022 levels.24 CBO also provides alternative projections where such
assumptions are revised. If tax reductions in the 2017 tax revision were extended, CBO projects
that federal debt held by the public would increase to 122% of GDP by FY2032. Alternatively,
CBO projects that if discretionary spending were to be nominally frozen, or held at FY2022
nominal levels (leading to declining real discretionary spending over the baseline window with
positive inflation), federal debt held by the public would equal 102% of GDP at the end of
FY2032.
CBO also produces a long-term baseline that uses a number of additional assumptions to extend
its standard baseline an additional 20 years (thus the 2022 long-term baseline runs through
FY2052). The current long-term forecast projects that publicly held federal debt will equal 185%
of GDP in FY2052, which would easily exceed the highest stock of federal debt experienced in
the FY1940-FY2022 period (106% of GDP in FY1946).
CBO projects increases in both net interest payments and publicly held federal debt over the next
10 years, leading to a significant rise in U.S. net interest payments. As noted above, CBO projects
that publicly held federal debt will rise from 96% of GDP in FY2023 to 110% of GDP in
FY2032, and projects federal net interest payments of 3.3% of GDP in FY2032, which would be
the highest real amount devoted to net interest since FY1940 (3.2% of GDP in FY1991).
Addressing the potential consequences of long-term federal debt projections will likely involve
policy adjustments that reduce future budget deficits, through either tax increases, reductions in
spending, or a combination of the two. Under CBO’s extended baseline, maintaining the debt-to-
GDP ratio at roughly the current level (100%) in FY2052 would require a permanent cut in
noninterest spending, increase in revenues, or some combination of the two in the amount of
2.8% of GDP (or about $800 billion in FY2027 alone) in each year from FY2027 to FY2052.
Maintaining this debt-to-GDP ratio beyond FY2052 would require additional deficit reduction.25
International Context
It may be useful to compare the recent U.S. federal borrowing trajectory with the practices of
international governments, as future interest rate and fiscal space considerations will both be
affected by the behavior of other major actors. Table 3 includes the general government debt for
Group of Seven (G7) countries from 2002 to 2022.26
Table 3. IMF General Gross Debt for G7 Countries, 2002-2022
(as a percentage of GDP; change from preceding column in parentheses)
Country
2002
2007
2012
2017
2022
United States
56%
65% (+9)
103% (+38)
106% (+3)
122% (+16)
Canada
80%
67% (-14)
85% (+18)
89% (+4)
102% (+13)
24 The 2017 tax revision included a number of reductions to individual income tax rates and tax expenditures that are
scheduled to expire under current law. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), passed as
part of the Consolidated Appropriations Act, 2016 (P.L. 114-113), modified most of the previously expired tax
provisions that had been extended several times by past Congresses. The PATH Act made many of those provisions
permanent, while others were extended through the 2016 or 2019 tax year. Provisions that were not made permanent
are assumed to expire as scheduled under the CBO baseline.
25 Congressional Budget Office, The 2022 Long-Term Budget Outlook, July 2022.
26 General government debt includes both federal and municipal (state and local) debt, and IMF projections typically
adhere closely to current policy baseline assumptions.
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France
60%
65% (+5)
91% (+26)
98% (+7)
112% (+14)
Germany
60%
64% (+4)
81% (+17)
65% (-16)
71% (+6)
Italy
106%
104% (-2)
127% (+23)
134% (+7)
147% (+13)
Japan
154%
173% (+19)
226% (+53)
231% (+5)
264% (+33)
United Kingdom
34%
41% (+7)
83% (+42)
85% (+2)
87% (+2)
All G7
77%
81% (+4)
121% (+40)
117% (-4)
128% (+11)
Countries
Source: International Monetary Fund, World Economic Outlook, October 2022.
Notes: General gross debt includes debt held by municipal governments and includes only publicly held debt.
Increases from preceding period colored red; decreases from preceding period colored green.
Table 3 highlights the effect of economic recessions on general government debt, with large G7
debt increases immediately following the Great Recession (a 40% increase from 2007 to 2012)
and the COVID-19 pandemic (an 11% increase from 2017 to 2022). Changes in total G7 debt
cumulatively offset in other periods, with a 4% increase from 2002 to 2007 and a 4% decrease
from 2012 to 2017 (inclusive of a relatively large decline in German debt during that period).
Relative to the general G7 experience, the United States experienced a similar increase in general
gross debt following recessions (a 54% increase in debt for the United States versus a 51%
change for G7). The increase in U.S. general gross debt in other periods (12% cumulative
increase in 2002-2007 and 2012-2017), however, differed from the flat trajectory of all G7
general gross debt.
Author Information
Grant A. Driessen
Specialist in Public Finance
Disclaimer
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