Does America have to ever pay back its debt?
Luke Gurnhill
American debt has been rising rapidly the past few years and has become more of a concern to people across the globe. When the government spends more than it collects in taxes that year, it is running a budget deficit and will have to borrow money to fund this difference in spending and revenue. The way the government can borrow this money is often by selling ‘bonds’ which allows firms to loan money to the government for a fixed length of time and in return receive a fixed amount of interest, called a coupon. This borrowed money is called debt, and is key to allowing governments to spend much more money and invest it into infrastructure to hopefully grow the economy at a faster rate. Despite America recently having to suspend its debt ceiling until 2025 due to exceeding their limit of $31.4 trillion, and needing to increase it in the near future, few people around the world are actually worried. This is because since 1960, Congress has successfully raised the debt limit 78 times with little consequence. 1 A debt ceiling is the maximum amount of debt that America is legally allowed to have and so raising the limit allows the government to borrow more, by ‘issuing’ more or larger bonds for institutions and sovereign wealth funds to buy. This is so they can fund all their infrastructure projects and yearly expenses like Social Security, Medicare and National Defence, without having to raise taxes. So debt is very important. Although the debt levels are very high, at around 127% of America’s GDP, 2 and have been increasing at a high rate during the past two decades, the amount they need to pay each year to service the debt (pay the interest) is only 3.6% of GDP. 3 This means that year on year, the large debt isn’t as expensive as it may seem and if they can find a way to always service the debt then America will not have to ever pay back its debt. An example of a country getting away with just servicing some of their debt for hundreds of years, is the UK, where only recently they have fully paid back debt which they incurred in 1720 due to the ‘South Sea Bubble’. 4
This could become more of a problem for the US, because the Congressional Budget Office (CBO) projects for the next 10 years, there will be yearly budget deficits of over $1 trillion. These yearly deficits are estimated to increase the already high debt level of $32 trillion to $52 trillion, making the interest
1 Scott Simon and Lennon Sherburne, ‘Congress has revised the debt ceiling 78 times since 1960. An expert explains why’, NPR, last modified 29 April 2023, https://www.npr.org/2023/04/29/1172894580/congress-has- revised-the-debt-ceiling-78-times-since-1960-a-financial-historian-. 2 ‘United States Gross Federal Debt to GDP’, Trading Economics, date accessed 1 August 2023, https://tradingeconomics.com/united-states/government-debt-to-gdp. 3 ‘The Budget and Economic Outlook: 2023 to 2033, Congressional Budget Office, date accessed 3 August 2023, https://www.cbo.gov/publication/58946. 4 Stephen Castle , ‘That Debt From 1720? Britain’s Payment Is Coming’, The New York Times, last modified 27 December 2014, https://www.nytimes.com/2014/12/28/world/that-debt-from-1720-britains-payment-is- coming.html.
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