Skip to main content
diversification.com
← Back to F Definitions

Federal debt

What Is Federal Debt?

Federal debt, also known as national debt or public debt, represents the total accumulated borrowing by a central government to finance its operations and obligations. It arises within the realm of public finance, a branch of economics that studies government revenue and government spending. When a government's expenditures exceed its tax revenue in a given fiscal year, it incurs a budget deficit. To cover this shortfall, the government borrows money, primarily by issuing Treasury securities to investors. The accumulation of these annual deficits, along with the interest owed on the borrowed funds, constitutes the federal debt.

History and Origin

The concept of federal debt in the United States dates back to its inception. Debts incurred during the American Revolutionary War amounted to $75 million, largely borrowed from domestic investors and the French Government for war materials.17 Over the past century, the U.S. federal debt has significantly increased, from $395 billion in 1924 to over $35 trillion in 2024.16

Significant spikes in federal debt have historically been associated with major national emergencies, such as wars or severe economic downturns like the Great Depression. More recently, the COVID-19 pandemic led to a substantial increase in federal spending, including stimulus checks and aid for businesses, which contributed to a sharp rise in the federal debt.15

Key Takeaways

  • Federal debt is the total amount of money a central government owes to its creditors, accumulated through past borrowing to cover budget deficits.
  • It is financed primarily by issuing government securities, such as Treasury bonds, notes, and bills.
  • The federal debt can be categorized as "debt held by the public" and "intragovernmental holdings."
  • A high federal debt can have implications for economic growth, interest rates, and a nation's fiscal flexibility.
  • Organizations like the International Monetary Fund (IMF) Fiscal Monitor regularly assess global public debt levels and their potential risks.

Formula and Calculation

While there isn't a single "formula" for calculating the total federal debt itself, as it's a cumulative figure, its growth is directly linked to the annual budget deficit (or surplus) and the interest accrued on existing debt.

The change in federal debt for a given period can be understood as:

Change in Federal Debt=Annual Budget Deficit (or Surplus)+Interest Paid on Existing Debt\text{Change in Federal Debt} = \text{Annual Budget Deficit (or Surplus)} + \text{Interest Paid on Existing Debt}

Where:

  • Annual Budget Deficit (or Surplus): The difference between government spending and tax revenue in a fiscal year. A deficit increases the debt, while a surplus decreases it.
  • Interest Paid on Existing Debt: The cost of servicing the outstanding federal debt, which depends on the total debt amount and prevailing interest rates on the government's issued securities.

The U.S. Treasury Fiscal Data provides detailed daily information on the national debt.14

Interpreting the Federal Debt

Interpreting the federal debt requires understanding its magnitude relative to the size of the economy, typically measured as a percentage of gross domestic product (GDP)). A higher debt-to-GDP ratio generally indicates a greater challenge for a government to repay its debt. For instance, the U.S. debt-to-GDP ratio surpassed 100% in 2013 and has remained elevated.13

Economists and policymakers analyze the federal debt to gauge the fiscal health of a nation and its capacity to meet future obligations. Factors influencing the debt's interpretation include the prevailing interest rates (as higher rates increase the cost of servicing the debt), the rate of economic growth, and the nation's ability to generate sufficient tax revenue. A sustained period of high deficits can lead to a continuously growing federal debt, potentially crowding out private investment and increasing the risk of higher interest rates.12

Hypothetical Example

Imagine a hypothetical country, "Econoville," with the following fiscal data for a given year:

  • Total Government Spending: $2 trillion
  • Total Tax Revenue: $1.8 trillion
  • Existing Federal Debt at the start of the year: $15 trillion
  • Average Interest Rate on Debt: 3%

To calculate the increase in Econoville's federal debt for the year:

  1. Calculate the Budget Deficit:
    Budget Deficit = Government Spending - Tax Revenue
    Budget Deficit = $2 trillion - $1.8 trillion = $0.2 trillion (or $200 billion)

  2. Calculate the Interest Paid on Existing Debt:
    Interest Paid = Existing Federal Debt × Average Interest Rate
    Interest Paid = $15 trillion × 0.03 = $0.45 trillion (or $450 billion)

  3. Calculate the Increase in Federal Debt:
    Increase in Federal Debt = Budget Deficit + Interest Paid
    Increase in Federal Debt = $0.2 trillion + $0.45 trillion = $0.65 trillion

So, Econoville's federal debt would increase by $650 billion in that year, bringing its total federal debt to $15.65 trillion. This example highlights how ongoing budget deficit and the cost of servicing existing obligations contribute to the growth of federal debt.

Practical Applications

Federal debt plays a crucial role in financial markets and economic analysis. Government securities, which represent portions of the federal debt, are considered among the safest investments globally, serving as benchmarks for other debt instruments. The yield on Treasury securities influences interest rates across various sectors of the economy, including mortgages and corporate bonds.

11Analysts monitor the federal debt-to-gross domestic product (GDP)) ratio to assess a nation's fiscal sustainability and creditworthiness. International organizations such as the International Monetary Fund (IMF) issue reports, like their Fiscal Monitor series, that analyze global public debt trends and their implications for the global economy. T10he Federal Reserve Bank of New York also closely tracks Treasury market conditions as part of its monetary policy operations.

Limitations and Criticisms

While federal debt can be a tool for economic management, it is not without limitations and criticisms. A primary concern is its potential to "crowd out" private investment. When the government borrows heavily, it competes with private companies for available capital, which can drive up interest rates and make it more expensive for businesses to borrow and invest.

9Another criticism revolves around the long-term sustainability of high debt levels. Critics argue that persistently rising federal debt could lead to a fiscal crisis, where investors lose confidence in a country's ability to repay its obligations, potentially triggering a sharp increase in government borrowing costs or even a default. T8he Council on Foreign Relations (CFR) has expressed concerns about the U.S. national debt's unsustainable trajectory, warning of potential dangers such as a budget crisis and greater economic instability.

7Furthermore, large interest payments on the federal debt can limit a government's fiscal flexibility, diverting funds from other critical areas like infrastructure, education, or social programs. T6his can create difficult trade-offs for policymakers, especially during periods of economic downturns or national emergencies.

Federal Debt vs. Budget Deficit

The terms "federal debt" and "budget deficit" are often used interchangeably but represent distinct concepts in public finance.

The budget deficit refers to the amount by which a government's total expenditures exceed its total revenues in a single fiscal year. It is a flow concept, representing the financial shortfall for a specific period, typically 12 months. When a government runs a budget deficit, it must borrow money to cover the difference.

In contrast, the federal debt is the cumulative sum of all past annual budget deficits (minus any surpluses) that a government has accumulated over its entire history. It is a stock concept, representing the total outstanding obligations at a given point in time. Therefore, each year's budget deficit adds to the overall federal debt.

Think of it this way: if you spend more than you earn in a month, you have a monthly deficit. Your total credit card balance, which accumulates over time from all your monthly shortfalls, represents your debt. The same principle applies to government finances.

FAQs

What is the current size of the federal debt?

The U.S. federal debt is dynamic and constantly changing. For the most up-to-date figure, one can refer directly to the U.S. Treasury Fiscal Data website, which provides daily updates. A5s of late July 2025, the U.S. national debt was approximately $36.72 trillion.

4### How does federal debt impact the economy?

Federal debt can influence the economy in several ways. High levels of debt can potentially lead to higher interest rates as the government competes for borrowed funds, which may make it more expensive for businesses and individuals to borrow. I3t can also impact a nation's creditworthiness and fiscal flexibility, potentially limiting its ability to respond to future economic challenges.

2### Who owns the federal debt?

The federal debt is owned by a wide range of entities. It is primarily divided into "debt held by the public" and "intragovernmental holdings." Debt held by the public includes holdings by individual investors, corporations, the Federal Reserve, foreign governments, and state and local governments. Intragovernmental holdings represent government account surpluses, such as the Social Security Trust Fund, invested in Treasury securities.

Is a rising federal debt always a bad thing?

Not necessarily. While a perpetually rising federal debt can pose risks, borrowing can be beneficial in certain circumstances. For example, during an economic recession or a national crisis, government borrowing can stimulate the economy and provide necessary aid. T1he key is to assess the purpose of the borrowing, the ability to repay, and the overall economic context. Temporary borrowing to address critical needs can be distinguished from long-term structural imbalances between government spending and tax revenue.