How National Debt Affects Long-Term Economic Growth

U.S. National Debt Surpassed $33 Trillion in 2023

The U.S. Treasury reported that total national debt surpassed $33 trillion in September 2023, making the United States the world's largest sovereign debtor by absolute amount. The federal government spent approximately $659 billion servicing that debt in fiscal year 2023—more than it spent on Medicaid ($616 billion) and approaching defense spending ($858 billion). Net interest payments as a share of GDP reached approximately 2.4% in 2023, a level that would double by 2033 under Congressional Budget Office projections if spending and revenue trends continue unchanged.

National debt is the cumulative total of all past federal budget deficits minus any surpluses. Its growth relative to the size of the economy—the debt-to-GDP ratio—is the most relevant metric for assessing its economic consequences.

How Government Debt Accumulates

The federal government runs a budget deficit when spending exceeds tax revenues in a given fiscal year. The government finances this shortfall by issuing Treasury securities—bills, notes, and bonds—to domestic and foreign investors. Each year's deficit adds to the existing stock of debt.

The U.S. has run budget deficits in most years since the early 1970s, with only brief surpluses from 1998 to 2001 during the Clinton administration's combination of reduced defense spending, welfare reform, and a technology-driven revenue boom. The trajectory of debt-to-GDP tells the longer story:

When Debt Helps: The Case for Deficit Spending

Not all government debt is created equal or harmful. Borrowing can be economically beneficial under the right conditions:

• Recession response: Deficit spending during downturns acts as automatic stabilizers and deliberate stimulus, potentially reducing the depth and duration of recessions. The 2009 American Recovery and Reinvestment Act ($787 billion) and 2020–2021 COVID relief ($5+ trillion combined) were intentional uses of deficit financing.
• Public investment: Borrowing to fund infrastructure, research, and education can raise long-term productive capacity. The interstate highway system, financed in part by deficit spending in the 1950s–1960s, generated significant long-run economic returns.
• Low interest rate environments: When real interest rates are below GDP growth rates (r < g), debt can be rolled over and financed without rising debt burdens. Economist Olivier Blanchard's 2019 work argued this condition may persist longer than traditionally assumed.

When Debt Becomes Problematic

High debt levels create economic risks that intensify as the debt-to-GDP ratio rises.

The Crowding-Out Effect

Government borrowing competes with private investment for available savings. When the government issues large quantities of bonds, it can drive up interest rates, raising the cost of private capital. Higher borrowing costs reduce business investment in equipment, technology, and structures—potentially slowing long-run productivity growth. In the U.S. context, this effect is partially mitigated by the global demand for dollar-denominated safe assets, which suppresses yields below what purely domestic crowding-out would predict.

Interest Payment Burden

As debt grows, interest payments consume an increasing share of government revenue. By the Congressional Budget Office's 2023 projections, net interest would absorb 35 cents of every federal tax dollar by 2053, leaving less for defense, healthcare, infrastructure, and other priorities. This is not a crisis trigger—it is a slow-moving fiscal constraint that compresses future government flexibility.

The Reinhart-Rogoff Debate and the 90% Threshold

A landmark 2010 paper by economists Carmen Reinhart and Kenneth Rogoff claimed that countries with debt-to-GDP ratios above 90% experienced significantly lower economic growth. The finding was enormously influential in policy debates, cited as justification for European austerity programs.

In 2013, economists Thomas Herndon, Michael Ash, and Robert Pollin discovered a coding error in Reinhart and Rogoff's spreadsheet and selective data exclusions. When corrected, the 90% threshold effect largely disappeared, though some relationship between high debt and lower growth survived in the corrected analysis.

The debate continues: high debt may cause lower growth, or slow growth may cause debt accumulation, or both may be driven by a third factor such as demographic decline or low productivity.

Factors That Determine Whether High Debt Is Sustainable

Japan's debt-to-GDP ratio exceeded 260% by 2023 without triggering a debt crisis, largely because the Bank of Japan held much of the debt and Japanese domestic savings rates were high. Argentina, by contrast, repeatedly defaulted on foreign-currency debt, illustrating how debt structure matters as much as quantity.

The Path Forward: Stabilizing the Debt Ratio

Stabilizing debt-to-GDP does not require eliminating the deficit—it requires keeping the deficit small enough that debt grows no faster than GDP. If the economy grows at 3% nominally and the primary deficit (before interest payments) is small, the debt ratio can be stable or declining even without a balanced budget. The challenge for high-debt economies is that aging demographics and rising healthcare costs create structural spending pressures that push against stabilization without deliberate policy action.