US national debt hits record $34 trillion as Congress gears up for funding fight

WASHINGTON — The federal government's gross national debt has surpassed $34 trillion, a record high that portends coming political and economic challenges to improve America's balance sheet in the coming years.

The U.S. Treasury Department on Tuesday released a report tracking America's finances, which have become a source of tension in politically divided Washington that could see parts of the government shut down without an annual budget.

Republican lawmakers and the White House agreed last June to temporarily lift the nation's debt limit, averting the risk of a historic default. That agreement applies until January 2025. Here are some answers to questions about the new record national debt.

The national debt eclipsed $34 trillion several years earlier than pre-pandemic forecasts. According to January 2020 Congressional Budget Office projections, gross federal debt would exceed $34 trillion in fiscal year 2029.

But debt grew faster than expected due to a multi-year pandemic that began in 2020 and shut down much of the U.S. economy. The government borrowed heavily under then-President Donald Trump and current President Joe Biden to stabilize the economy and support a recovery. But the recovery was accompanied by a rise in inflation, which pushed up interest rates and made it more expensive for the government to service its debts.

“Until now, Washington has spent money as if we had unlimited resources,” said Sung Won Sohn, an economics professor at Loyola Marymount University. “But the bottom line is there is no free lunch,” he said, “and I think the outlook is pretty bleak.”

Gross debt includes money the government owes itself, so most policymakers rely on the public's total debt when assessing government finances. This lower figure – $26.9 trillion – is roughly equal in size to the US gross domestic product.

Last June, the Congressional Budget Office estimated in its 30-year outlook that the national debt will equal a record 181% of U.S. economic activity by 2053.

The national debt does not appear to be putting pressure on the US economy at this time, as investors are willing to lend money to the federal government. These loans allow the government to continue spending money on programs without having to raise taxes.

But the trajectory of the debt burden in the coming decades could jeopardize national security and major programs, including Social Security and Medicare, which have become the most prominent drivers of projected government spending in the coming decades. Government dysfunction, such as another showdown over the debt limit, could also pose a financial risk as investors worry about lawmakers' willingness to pay back U.S. debt.

Foreign buyers of US debt – such as China, Japan, South Korea and European countries – have already reduced their holdings of government bonds.

An analysis by the Peterson Foundation shows that foreign ownership of U.S. debt peaked at 49 percent in 2011, but had fallen to 30 percent by the end of 2022.

“Looking ahead, debt levels will continue to rise as the Treasury Department expects to borrow nearly $1 trillion more by the end of March,” said Michael Peterson, CEO of the Peterson Foundation. “Adding trillion after trillion in debt, year after year, should be a flashing red warning signal to every policymaker who cares about our country's future.

The debt is about $100,000 per person in the US. That sounds like a lot, but it doesn't seem like the amount is posing a threat to U.S. economic growth so far.

Instead, there is a long-term risk if debt continues to rise to unknown levels. Sohn said higher debt levels could put upward pressure on inflation and keep interest rates high, which could also increase the cost of servicing the national debt.

And as the debt problem evolves over time, the choices may become more serious as the costs of Social Security, Medicare, and Medicaid continue to exceed tax revenues.

When it could turn into a more serious situation is anyone's guess, said Shai Akabas, director of economic policy at the Bipartisan Policy Center, “but if and when that does happen, it could have very significant consequences that occur very quickly.”

“It could lead to spikes in interest rates, it could mean a recession leading to a lot more unemployment. It could lead to another bout of inflation or strange events with consumer prices – some of which are things we have seen in recent years,” he said.

Both Democrats and Republicans have called for debt reduction, but they disagree on the right way to do it.

The Biden administration has pushed for tax hikes on the wealthy and corporations to reduce budget deficits, in addition to financing its domestic agenda. Biden also increased the budget for the IRS so it can collect unpaid taxes and potentially reduce debt by hundreds of billions of dollars over a decade.

Republican lawmakers have called for major cuts to non-defense government programs and a repeal of the clean energy tax credits and spending passed in the Inflation Reduction Act. But Republicans also want to trim Biden's IRS funding and cut taxes further, both of which could worsen the debt.

A Treasury Department representative did not respond to a request for comment.

Akabas said: “There is growing concern among investors and rating agencies that the trajectory we are on is unsustainable – when that will turn into an even more dire situation is anyone's guess.”