Understanding the US Government Budget Deficit: Why Does It Matter?

Marina Vanni

As of the latest available data, the US government’s gross federal debt stands at US$ 33 trillion. This includes both the public debt, which is owed to external entities, and the intra-governmental debt, which represents money the government owes to itself.

This is the equivalent to more than US$ 101.000 per person in the country, according to the Peter G. Peterson Foundation, which closely monitors these figures and alerts of an unsustainable debt trajectory.

Over the past decades, the US government debt has experienced a significant increase. Only two decades ago (fiscal year 2003), the gross federal debt equalled US$ 11.27 trillion. Factors contributing to this surge included economic downturns, financial crises, and expansionary fiscal policies.

Currently, the US debt-to-GDP ratio is 123%, a very high percentage when compared to other major economies such as China, where the debt-to-GDP ratio reaches 77% according to the IMF, or Germany, with a 64.6% as per official country data.

Only on this budget year, the deficit was calculated to reach an astonishing US$ 1.5 trillion, as stated by the Congressional Budget Office.

While the size of the US debt is substantial, factors such as the strength of the American economy, the role of the US dollar as a global reserve currency, and historical creditworthiness play a crucial part in shaping the international perception of such debt.

Several sectors and entities advocate for stricter policies to prevent overburdening future generations. Critics argue that uncontrolled debt could lead to economic instability, inflation, and limited fiscal space during crises.

Nevertheless, the beneficiaries of the increasing US debt are diverse. Government spending funded by debt can stimulate economic growth, create jobs, and support essential programs.

Generally, if there are concerns about the sustainability of the debt, interest rates may rise, impacting borrowing costs for the government and potentially affecting other interest-sensitive sectors. In this scenario, bond traders closely monitor the government debt situation. In particular, "bond vigilantes" are especially proactive in responding to economic and fiscal policies that they believe may lead to unfavorable outcomes.

Author: Marina Vanni