- US Economy
- Fiscal Policy
Ways to Reduce the National Debt
ByKimberly Amadeo
Updated on June 19, 2024
Reviewed by
Robert C. Kelly
:max_bytes(150000):strip_icc()/ScreenShot2020-03-23at2.04.43PM-59de96b153e540c498f1f1da8ce5c965.png "Will the U.S. Ever Pay Off Its Debt? (1)")
Reviewed byRobert C. Kelly
Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital.
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Fact checked byEmily Ernsberger
In This Article
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In This Article
- What Stops the U.S. From Paying Its Debt?
- U.S. Debt Milestones
- Four Ways the U.S. Could Pay Off Its Debt
- Frequently Asked Questions (FAQs)
:max_bytes(150000):strip_icc()/will-the-u-s-debt-ever-be-paid-off-3970473-finalv2-acb523b4dacf43529f4915254c600777-64dc8c15fa3345438ef293f439a58046.jpg "Will the U.S. Ever Pay Off Its Debt? (2)")
Congress has made many attempts to lower the national debt, but it hasn't been able to reduce the growth of what the nation owes. TheU.S. debtis the outstanding obligation owed by the federal government.
It exceeded $34 trillion for the first time in December 2023, and it has increased by at least $1 trillion each year since 2016.
Key Takeaways
- Federal debt is at its highest point in American history.
- Raising taxes and cutting spending are two of the most popular solutions for reducing debt, but politicians may be hesitant to do both.
- Diverting spending from the military to other sectors may boost job growth, which could spur consumer spending and help the economy.
What's Stopping the U.S. From Paying Down Its Debt?
Most creditors don’t worry about a nation's debt, also known as sovereign debt, until it's more than 77% of gross domestic product (GDP). That's the point at which added debt cuts into annual economic growth, according to theWorld Bank.
At the end of the first quarter of 2024, the U.S.debt-to-GDPratio was 122%. That's much higher than the tipping point and is a concern for many. Over $27 trillion of that national debt ispublic debt, which is what the government owes to investors and taxpayers.
Congress places a limit on public debt. It increased the limit by $2.5 trillion in December 2021, to nearly $31.4 million. Though it has since breached that limit, the government has not again raised the debt limit, choosing instead to suspend it through at least December 31, 2024.
Why isn't the U.S. eliminating its debt and paying people back? There are a few reasons.
Economic Growth Has Outpaced Its Debt
U.S. economic growth has historically outpaced its debt. The U.S. debt was $258.68 billion in August 1945, but the economy outgrew that in a few years. GDP more than doubled by 1960. Congressbelievesthat today's debt will be dwarfed by tomorrow's economic growth.
Congress Has a Lot to Lose
Members of Congress have a lot to lose by cutting spending. They could lose their next election if they cutSocial Security or Medicare benefits.
Raising Taxes Isn't Popular
Raising taxes can be politically unpopular. Experts believe that President George H.W. Bush lost reelection because he raised taxes after promising he wouldn't at the 1988 Republican convention. He raised taxes in 1990 to reduce the deficit, and voters remembered.
U.S. Debt Milestones
The national debt has grown so large over time that people notice when it hits a new high. Here are just a few milestones over the years.
| New Debt Milestone | Date or Year |
|---|---|
| $25 billion | 1934 |
| $40 billion | 1939 |
| $100 billion | 1943 |
| $250 billion | 1945 |
| $500 billion | 1975 |
| $1 trillion | 1982 |
| $2 trillion | 1986 |
| $3 trillion | 1990 |
| $4 trillion | 1992 |
| $5 trillion | 1996 |
| $6 trillion | 2002 |
| $7 trillion | 2004 |
| $8 trillion | 2005 |
| $9 trillion | 2007 |
| $10 trillion | 2008 |
| $11 trillion | March 2009 |
| $12 trillion | November 2009 |
| $13 trillion | June 2010 |
| $14 trillion | December 2010 |
| $15 trillion | 2011 |
| $16 trillion | 2012 |
| $17 trillion | 2013 |
| $18 trillion | 2014 |
| $19 trillion | 2016 |
| $20 trillion | 2017 |
| $21 trillion | 2018 |
| $22 trillion | February 2019 |
| $23 trillion | October 2019 |
| $24 trillion | April 2020 |
| $25 trillion | May 2020 |
| $26 trillion | June 2020 |
| $27 trillion | October 2020 |
| $28 trillion | March 2021 |
| $29 trillion | December 2021 |
| $30 trillion | January 2022 |
| $31 trillion | October 2022 |
| $32 trillion | June 2023 |
| $33 trillion | September 2023 |
| $34 trillion | December 2023 |
Four Ways the U.S. Could Pay Off Its Debt
There are two main themes in most discussions about paying off the national debt: cutting spending and raising taxes. Other options might not enter most conversations but can aid in debt reduction, too.
Cut Spending
The 2010bipartisan Simpson-Bowles report is a good example of how the government could cut spending to reduce debt. The report proposed balancing the budget through a mix of spending cuts and tax reform. Congress didn't adopt the complete plan, but the government did implement parts of it with some success.
Note
A 2015 report from the Committee for a Responsible Federal Budget indicated that although a piecemeal approach reduced debt, full-fledged adoption of the Simpson-Bowles plan may have produced a significantly lower debt-to-GDP ratio.
Raise Taxes
Raising taxes can generate revenue that the government can use to pay down debt as well as invest in programs that support the economy. But it can cut into tax revenue and hurt the economy if the government raises taxes too high. Finding the correct balance is expressed by a concept known as theLaffer Curve.
Grow the Economy Faster
Increasing the GDP has a twofold benefit: It generates extra revenue to pay down debt, and it reduces the debt-to-GDP ratio if GDP growth outpaces debt growth.
Driving economic growth is one way to reduce the national debt, but Congress tends to disagree on how to create that growth. MostDemocratspush increased spending, while most Republicans champion lower taxes. However, unlimited growth is an unrealistic goal, so growth alone can't solve the federal debt.
Shift Spending
Congress couldshift spending from defense to job-creation areas like infrastructure and education. Almost 15% of government spending goes to themilitary. However, past studies indicate that money spent on the military is less effective in creating jobs than money spent in other areas.
According to a report from the Political Economy Research Institute at the University of Massachusetts, Amherst, $1 billion in education and mass transit spending could produce more than twice the jobs created by military spending. Job creation can help boost the GDP, which can help lower the nation's debt-to-GDP ratio in many cases.
Frequently Asked Questions (FAQs)
How much debt does the United States have?
The national debt grew to a record high of more than $34.7 trillion in June 2024.
Whom is the United States in debt to?
The U.S. isn't in debt to any one person or government. Many people, countries, and institutions hold U.S. federal debt in the form of securities like Treasury bonds. The top owners of U.S. debt include individual U.S. investors, the Federal Reserve, other government accounts, and nations such as Japan, China, and the United Kingdom.
What is the U.S. debt limit?
The debt ceiling is the limit on what the U.S. government can borrow to pay bills that have come due. Congress puts this limit in place each year. The debt limit isn't about future debt. Instead, it's about paying for spending that Congress authorized in previous years. If Congress does not raise the federal debt as needed, then the U.S. government cannot pay its bills and will default.
Updated byHilarey Gould
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Fiscal Data Treasury.gov. "Debt to the Penny."
World Bank. "Finding The Tipping Point -- When Sovereign Debt Turns Bad."
Federal Reserve Bank of St. Louis. "Federal Debt: Total Public Debt as Percent of Gross Domestic Product."
Congress.gov. “S.J.Res.33 – A joint resolution relating to increasing the debt limit.”
Tax Policy Center. "TaxVox: Campaigns, Proposals, and Reforms."
U.S. Congress. "H.R.5835 - Omnibus Budget Reconciliation Act of 1990."
Committee for a Responsible Federal Budget. "Five Years Since Simpson-Bowles: How Much of It Have We Enacted?"
Committee for a Responsible Federal Budget. "Could Faster Growth Solve Our Debt Woes?"
Institute for Policy Studies. "The U.S. Employment Effects of Military and Domestic Spending Priorities," Page 7.
Congressional Research Service. "Foreign Holdings of Federal Debt."
Bureau of the Fiscal Service. "Treasury Bulletin," Click: "Ownership of Federal Securities."
The White House. "The Debt Ceiling: An Explainer."
Part Of
The National Debt
- The US National Debt and How It Affects You1 of 13
- How Did the U.S. National Debt Get So Big?2 of 13
- US Debt Ceiling and Its Current Status3 of 13
- US National Debt Clock: How Its Warning Affects You4 of 13
- Who Owns the US National Debt?5 of 13
- What Is the Public Debt, and When Is It Too High?6 of 13
- U.S. Debt to China: How Much Is It, and Why?7 of 13
- Interest on the National Debt and How It Affects You8 of 13
- U.S. National Debt by Year9 of 13
- U.S. National Debt by President10 of 13
- U.S. Budget Deficit by Year11 of 13
- Will the U.S. Ever Get Out of Debt?12 of 13
- Will the US Ever Default on Its Debt? 13 of 13
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