Why the National Debt Matters

Debt is Expensive

Debt comes at a cost. To fund federal spending beyond its revenue capacity, the government must borrow from private markets, which entails paying interest on the borrowed money.

In 2024, interest payments accounted for 3.1% of the U.S. GDP, more than the federal government spent on Medicaid.

Interest payments are projected to rise to 5.4% of GDP by 2053, becoming the second-largest government expense behind only Social Security.

Debt Burdens Economic Growth

The national debt is a drain on the economy. Like taxes or tariffs, it demands funds that could have been used more efficiently by the private sector, but are instead directed toward government consumption, distorting market signals, reducing productivity, and slowing overall economic growth.

Federal spending financed by debt rather than taxes represents an even larger impediment to growth because taxpayers must pay not only for the spending but also the interest on the debt. This results in even higher long-term costs to taxpayers than if the government had simply raised taxes.

Other consequences of the national debt on economic growth include:

• Economic Uncertainty: Rising debt creates uncertainty about future government actions, including potential tax increases, service cuts, and inflation, which disrupts business forecasts and investment decisions.
• Crowding Out Capital: Government borrowing competes with the private sector for capital. As a result, American households and businesses might have to pay higher interest rates to borrow, reducing investment and slowing economic growth.

Debt Imposes Unfair Costs on Future Generations

The growing national debt—driven primarily by entitlement spending Medicare and Medicaid—will require future generations to pay for services consumed today.

As the federal government accumulates more debt, a larger portion of future budgets will be dedicated to paying interest on previous borrowing and spending, leaving less room for future productive government spending.

Discretionary federal spending, which includes spending on defense, education, infrastructure, and all other federal expenditures not encompassed by other categories listed, is forecasted to fall from 26% of the budget to 19% from 2025 to 2055.

The National Debt Is Becoming Unaffordable

The federal government is projected to run increasingly larger annual budget deficits, with seemingly no expectation of ever balancing the federal budget or running a surplus in coming decades.

As debt grows, a larger share of government spending goes to interest payments, limiting the ability to scale back borrowing. The increased need for credit and growing market skepticism over the federal government's long-term creditworthiness can drive interest rates higher. Higher interest rates mean higher borrowing costs, requiring even more debt issuance. This creates a self-reinforcing loop—rising debt leads to higher costs, which increases demand for more borrowing, escalating the long-term risk of default.

The fact that most federal spending is non-discretionary only worsens the situation, as there is limited flexibility to adjust course. The expectation of perpetual annual budget deficits and limited budget flexibility increasingly puts the federal government at the mercy of the market, with the federal government subject to the borrowing terms dictated by its creditors.