The federal government's debt to other government agencies is "intragovernmental debt." Social Security in the United States and other programs are funded by it. Spending more than the federal government earns in tax income increases the national debt. Deficits are added to the debt each year, while surpluses are erased.

What Is the Root of Our Debt Problem?

There is a direct link between government expenditure and the country's debt problem. A budget shortfall is inevitable, yet it's essential for economic growth. Expansionary fiscal policy is the name given to this approach. The government uses 2 Budgetary methods, such as expenditure increases or tax reductions, to boost the money supply in the economy.

This improves economic development in the near term by giving consumers and companies more money to spend. Defense, health care, and building are all funded by the federal government. Private companies or the government itself recruits new staff under the terms of the contracts. Fuel, food, and new clothing are among the things that workers buy with their earnings after work.

What Factors Contribute to the Debt Problem?

On January 31, 2022, the national debt exceeded $30 trillion. Daily, the national debt is tracked by the national debt clock and the US Department of the Treasury website. Intragovernmental and public debt are both parts of the total public debt. Over $23.5 trillion of the debt is owned by the general population.

The Federal Reserve, as well as foreign governments, possess Treasury bills, notes, and bonds. Government Account Series assets held by federal departments such as the Public Coffers, Federal Public Servant Retirement System, and United States Military Retirement System total $6.5 trillion more in intragovernmental debt.

What Is the Economic Impact of the National Debt?

When the debt ceiling is reached, the country is at risk of defaulting. There is no way to avoid this. However, this implies that the debt-to-GDP ratio will rise even more. When the debt-to-GDP ratio is more than 77%, investors are concerned about the possibility of default.

According to World Bank research, if the debt-to-GDP ratio surpasses 77 percent over a sustained period, it hinders economic development. The country loses 0.017 percentage points of yearly economic growth for every percentage point of debt above this threshold.

A high amount of public debt has been proven in several studies to have a negative influence on long-term economic growth through its effect on interest rates. Debt-to-GDP ratio increases might raise interest rates by 2 to 3 basis points, according to the Congressional Budget Office. Because companies cannot borrow as much money when interest rates are high, demand may be reduced.

How the Debt Affects You

A rising economy implies more money for programs you can benefit from since the national debt isn't near its breaking point, which means government spending will continue. However, your level of life may be jeopardized if your debt load surpasses a certain threshold. The economy might be slowed if interest rates rise. Investors' lack of trust in the stock market might result in reduced returns on your investments.

Furthermore, a downturn is not out of the question. The value of a country's currency is also affected since it is linked to the value of its bonds. As the currency's value decreases, foreign bondholders' repayments are worth less. As a result, demand is reduced even further, and interest rates rise.

What Steps Can We Take to Reduce the Debt?

Raising taxes and cutting spending are two government options for reducing its debt. These are two of the weapons of fiscal austerity, and both of them have the potential to impede the economy. However, reducing the budget has its drawbacks. GDP, the total monetary worth of all a country's products and services generated in a given year, was 30% of total government spending in 2021.

GDP will fall, and economic growth will stagnate if the government lowers spending too much. As a result, less money will come in and a higher budget deficit. Taxes can also hurt economic growth.

Creditors are confident that the government will pay back its debts as long as it remains below the tipping threshold. At some point, a country's potential to expand its economy will be hampered because of the burden of public debt it carries.