US national debt tops $34T: How much debt is too much debt?

The U.S. national debt surpassed $34 trillion this month for the first time in history and with large deficits expected to continue, questions about the sustainability of the debt burden are likely to mount.

The federal government just recorded its third-largest deficit in history when the U.S. ran a $1.7 trillion deficit in fiscal year 2023, which concluded at the end of September. That comes after the expiration of many of the COVID relief programs that drove the country’s two largest deficits – $3.1 trillion in FY2020 and $2.7 trillion in FY2021 – with rising costs of servicing the national debt a key factor.

As deficits persist at historically high levels and the national debt swells, concerns are growing about whether America’s debt dilemma could turn into a debt crisis, in large part due to relatively high interest rates brought about by the Federal Reserve’s fight against inflation.

"The time to start worrying is now," Marc Goldwein, senior vice president and senior policy director for the nonpartisan Committee for a Responsible Federal Budget (CRFB), told FOX Business. "There’s no sort of crisis inflection point. But the higher your debt is and the higher interest rates are, the bigger the threat to your near- and long-term sustainability."

US NATIONAL DEBT TOPS $34T FOR FIRST TIME IN HISTORY

The exact point at which the federal debt and the cost of servicing it becomes unsustainable is an open question. A recent report by the Congressional Research Service (CRS) noted, "Of particular concern is that the new interest rate environment could accelerate the timeline for reaching a ‘tipping point’ where GDP growth is persistently and adversely affected or a default on the debt… becomes imminent."

The CRS report explained that while there isn’t a consensus among economists about where the tipping point is, some estimates range from debt-to-GDP ratios of 80% to 200% and beyond – a range the U.S. currently finds itself within. For example, the Penn-Wharton Budget Model noted in a report from October that "the U.S. debt held by the public cannot exceed about 200 percent of GDP of GDP even under today’s generally favorable market conditions."

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The Federal Reserve Bank of St. Louis found that the federal debt held by the public as a percentage of gross domestic product (GDP) was at 95.4% as of Q3 2023, while the CRS report noted that the Congressional Budget Office "currently projects the publicly held debt-to-GDP ratio to reach 100.4% in FY2024 and 180.6% by FY2053."

"I don’t think we can measure by an exact level, because the question isn’t just how much debt do we have, but where is it headed and how much confidence is there that policymakers will pull us back? And so I think that the markets are gonna look at a combination of those questions," Goldwein said. 

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That dynamic played out in 2023 when the U.S. credit rating was downgraded a notch by both Moody’s and Fitch – which cited "political polarization" and "fiscal deterioration" as factors contributing to their respective downgrade decisions.

"At some point they may look at us and say, your political system is broken, your debt is out of control, there’s no plausible path to bring it back in line, and so we’re going to start demanding higher interest rates," Goldwein explained. "And that can lead to a bidding war and that can ultimately lead to, in the worst case scenario, a financial crisis."

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Japan is often noted as an example of a developed country that has dealt with a relatively high publicly held debt-to-GDP ratio of over 200% for years without entering a debt crisis to date. 

However, Goldwein said that Japan "is kind of an aberration" and has also dealt with stagnant economic growth for roughly three decades. Economists at the Penn-Wharton Budget Model economists added in their report that larger debt-to-GDP ratios in countries like Japan "are not relevant for the United States, because Japan has a much larger household saving rate, which more than absorbs the larger government debt."

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Goldwein went on to explain that the U.S. is facing debt sustainability issues in part because interest rates continue to exceed the U.S. economy’s growth rate. "We’re paying over 4% on almost all of our debt, which is faster than the economy grows, and that means that interest rates are going to really start to explode."

High interest rates and the rising cost of servicing the national debt also threaten to exacerbate budget debates as an increasingly greater share of spending goes to avoiding a default instead of other programs backed by policymakers.

"Last year we spent more on interest than on children or on Medicaid. Within a few years, interest is going to exceed the defense budget," Goldwein explained. Within a quarter century, it’s on course to be the single-largest government program."