WASHINGTON — America’s gross national debt topped $30 trillion for the first time Tuesday, an ominous fiscal milestone that underscores the fragile nature of the country’s long-term economic health as it grapples with soaring prices and the prospect of higher interest rates.
The breach of that threshold, which was revealed in new Treasury Department figures, arrived years earlier than previously projected as a result of trillions in federal spending that the United States has deployed to combat the pandemic. That $5 trillion, which funded expanded jobless benefits, financial support for small businesses and stimulus payments, was financed with borrowed money.
The borrowing binge, which many economists viewed as necessary to help the United States recover from the pandemic, has left the nation with a debt burden larger than the entire economy, surpassing levels of red ink not seen since World War II.
Some economists contend that the nation’s large debt load is not unhealthy given that the economy is growing, interest rates are low and investors are still willing to buy U.S. Treasury securities, which gives them safe assets to help manage their financial risk. Those securities allow the government to borrow money relatively cheaply and use it to invest in the economy.
Yet the figures come amid renewed concerns in Washington over the nation’s fiscal trajectory and its ballooning budget deficit, which is the gap between what the nation spends and the revenue it brings in. Those worries helped stall negotiations over President Joe Biden’s $2 trillion safety net and climate spending proposal, with Sen. Joe Manchin of West Virginia citing “staggering debt” as a reason he could not support the legislation.
The lingering pandemic has slowed the momentum of the economic recovery, fueling inflation rates unseen since the early 1980s and raising the prospect of higher interest rates, which could add to America’s fiscal burden.
“Hitting the $30 trillion mark is clearly an important milestone in our dangerous fiscal trajectory,” said Michael A. Peterson, CEO of the Peter G. Peterson Foundation, which advocates deficit reduction. “For many years before COVID, America had an unsustainable structural fiscal path because the programs we’ve designed are not sufficiently funded by the revenue we take in.”
The gross national debt represents debt held by the public, such as individuals, businesses and pension funds, as well as liabilities that one part of the federal government owes to another part.
Renewed concerns about debt and deficits in Washington follow years of disregard for the consequences of big spending. During the Trump administration, most Republicans ceased to be fiscal hawks and voted along party lines in 2017 to pass a $1.5 trillion tax cut along with increased federal spending.
While Republican lawmakers helped run up the nation’s debt load, they have since blamed Biden for putting the nation on a rocky fiscal path by funding his agenda. After a protracted standoff in which Republicans refused to raise America’s borrowing cap, threatening a first-ever federal default, Congress finally agreed in December to raise the nation’s debt limit to about $31.4 trillion.
In January 2020, before the pandemic spread across the United States, the Congressional Budget Office projected that the gross national debt would reach $30 trillion by around the end of 2025. The total debt held by the public surpassed the total output of the U.S. economy last year, a decade faster than forecasters projected. The nonpartisan office warned last year that rising interest costs and growing health spending as the population ages would increase the risk of a “fiscal crisis” and higher inflation, a situation that could undermine confidence in the U.S. dollar.
The Biden administration has defended the $1.9 trillion pandemic relief package the Democrats passed last year as a necessary measure to protect the economy from further damage. Treasury Secretary Janet Yellen has argued that such large federal investments are affordable because interest costs as a share of gross domestic product are at historically low levels thanks to persistently low interest rates.
But that backdrop could start to change as the Federal Reserve prepares to raise interest rates, which have been set near-zero since the start of the pandemic, to curb inflation.
The Fed indicated last week that it was on track to begin increasing rates at its next meeting in March. Investors are predicting the central bank could usher in five rate increases this year, bringing rates to a range of 1% to 1.25%.
The Fed has also been keeping long-term interest rates low by buying government-backed debt and holding those securities on its balance sheet. Those purchases are set to wrap up next month, and last week, the Fed signaled it planned to “significantly” shrink its bond holdings.
Esther L. George, president of the Federal Reserve Bank of Kansas City, suggested during a speech this week that the Fed’s big bond holdings might be weighing down longer-term interest rates by as much as 1.5 percentage points — nearly cutting the interest rate on 10-year government debt in half. While shrinking the balance sheet risks roiling markets, she warned that if the Fed remained a big presence in the Treasury market, it could distort financial conditions and imperil the central bank’s prized independence from elected government.
As rates rise, so does the amount that the United States owes to investors who buy its debt. The Congressional Budget Office estimates that if interest rates rise in line with their own forecasts, net interest costs will reach 8.6% of gross domestic product in 2051. That would amount to about $60 trillion in total interest payments over three decades.
“A larger amount of debt makes the United States’ fiscal position more vulnerable to an increase in interest rates,” the CBO said in its long-term budget outlook.
In a recent report, Brian Riedl, a senior fellow at the Manhattan Institute, a conservative think tank, pointed to the CBO’s prediction that the average interest rate on 10-year Treasury notes would rise from 1.6% to 4.9% over the next 30 years. He estimates that if interest rates exceeds that forecast by just 1 percentage point, it will mean another $30 trillion in interest costs during that time.
Riedl described policymakers who expected interest rates to remain low indefinitely as “hubristic” and said that it was risky to assume that low rates would keep the debt stable over time.
“The economy is unpredictable, and we should never take low interest rates and inflation for granted,” Riedl said in an interview.
The interest on the debt could soon be the fastest-growing part of the federal budget.
Biden administration officials insist that they view fiscal responsibility as a priority. They have pledged that their economic agenda will be fully paid for through tax increases on wealthy Americans and corporations and by more rigorous enforcement of the tax code. Yellen has predicted that inflation will moderate later this year and return to normal levels as supply chains stabilize.
In recent months, deficits have started to shrink as a stronger economy has boosted tax receipts and as government payments of pandemic relief money have slowed.
And some economists argue that a more recent economic phenomenon — inflation — may have a silver lining in that it could chip away at the nation’s debt burden.
Kenneth Rogoff, a Harvard University economist, said that rising prices essentially watered down the value of outstanding debt and increased tax revenue as incomes rise. He suggested that markets appeared to be largely unfazed by the possibility of higher interest rates so far and that given the other risks to the economy amid the pandemic, the scale of the national debt was not as worrying as it sounded.
“You would rather have no debt, of course,” Rogoff said of the $30 trillion total. “But compared to other issues at the moment that’s not the principal problem.”