Will the U.S. Ever Pay Off Its Debt?

Ways To Reduce the National Debt

Text reads: "4 ways the US can pay off its debt: cut government spending; raise taxes; drive economic growth at a faster rate; shift spending to areas that create the most jobs"

Chloe Giroux / The Balance

Congress has made many attempts to lower the national debt, but it hasn't been able to reduce the growth of what the nation owes. The U.S. debt is the outstanding obligation owed by the federal government.

It exceeded $29 trillion in December 2021, and it has increased by at least $1 trillion each year since 2016.

What's Stopping the U.S. From Paying Down Its Debt?

Most creditors don’t worry about a nation's debt, also known as "sovereign debt," until it's more than 77% of gross domestic product (GDP). That's the point at which added debt cuts into annual economic growth, according to the World Bank.

At the end of the second quarter of 2021, the U.S. debt-to-GDP ratio was 125%. That's much higher than the tipping point and is a concern for many. Over $22 trillion of that national debt is public debt, which is what the government owes to investors and taxpayers.

Congress places a limit on public debt. It increased the limit by $2.5 trillion in December 2021, to nearly $31.4 million.

So what's stopping the U.S. from eliminating its debt and paying people back? There are a few reasons.

Economic Growth Has Outpaced Its Debt

U.S. economic growth has historically outpaced its debt. The U.S. debt was $258.68 billion in August 1945, but the economy outgrew that in less than a few years. GDP more than doubled by 1960. Congress believes that today's debt will be dwarfed by tomorrow's economic growth.

Congress Has a Lot to Lose

Congressional representatives have a lot to lose by cutting spending. They could lose their next election if elected officials cut Social Security or Medicare benefits.

Raising Taxes Isn't Popular

Raising taxes can be politically unpopular. Experts believe President George H.W. Bush lost reelection because he raised taxes after promising he wouldn't at the 1988 Republican convention. He raised taxes in 1990 to reduce the deficit, and voters remembered.

U.S. Debt Milestones

The national debt has grown so large over time that people notice when it hits a new high. Here are just a few milestones over the years.

New Debt Milestone Date or Year
$25 billion 1934
$40 billion 1939
$100 billion 1943
$250 billion 1945
$500 billion 1975
$1 trillion 1982
$2 trillion 1986
$3 trillion 1990
$4 trillion 1992
$5 trillion 1996
$6 trillion 2002
$7 trillion 2004
$8 trillion 2005
$9 trillion 2007
$10 trillion 2008
$11 trillion March 2009
$12 trillion November 2009
$13 trillion June 2010
$14 trillion December 2010
$15 trillion 2011
$16 trillion 2012
$17 trillion 2013
$18 trillion 2014
$19 trillion 2016
$20 trillion 2017
$21 trillion 2018
$22 trillion February 2019
$23 trillion October 2019
$24 trillion April 2020
$25 trillion May 2020
$26 trillion June 2020
$27 trillion October 2020
$28 trillion March 2021
$29 trillion December 2021

4 Ways the U.S. Could Pay Off Its Debt

There are two main themes in most discussions about paying off the national debt: cutting spending and raising taxes. There are other options that may not enter most conversations but can aid in debt reduction, too.

Cut Spending

The 2010 bipartisan Simpson-Bowles report is a good example of how the government could cut spending to reduce debt. The report proposed balancing the budget through a mix of spending cuts and tax reform. Congress didn't adopt the complete plan, but the government did implement parts of it with some success.

A 2015 report from the Committee for a Responsible Federal Budget indicated that although a piecemeal approach reduced debt, full-fledged adoption of the Simpson-Bowles plan may have produced a significantly lower debt-to-GDP ratio.

Raise Taxes

Raising taxes can generate revenue that the government can use to pay down debt. But it can cut into tax revenue and hurt the economy if the government raises taxes too high. Finding that tipping point is expressed by a concept known as the "Laffer Curve." Tax cuts are tricky, but they've historically proved successful in the mid-1920s, the mid-1960s, and the early 1980s.

Grow the Economy Faster

Increasing the GDP has a twofold benefit: It generates extra revenue to pay down debt, and it reduces the debt-to-GDP ratio if GDP growth outpaces debt growth.

Driving economic growth is one way to reduce the national debt, but Congress tends to disagree on how to create that growth. Most Democrats push increased spending, while most Republicans champion lower taxes.

Shift Spending

Congress could shift spending from defense to job-creation areas like infrastructure and education. Almost 15% of government spending goes to the military. But past studies indicate that money spent on the military is less effective in creating jobs than money spent in other areas.

According to a report from the Political Economy Research Institute at the University of Massachusetts, Amherst, $1 billion in education and mass transit spending could produce more than twice the jobs created by military spending. Job creation can help boost the GDP, which can help lower the nation's debt-to-GDP ratio in many cases.

Key Takeaways

  • Federal debt is at its highest point in American history.
  • Raising taxes and cutting spending are two of the most popular solutions for reducing debt, but politicians may not want to do so if it means voters won't support them.
  • Diverting spending from the military to other sectors may boost job growth, which could spur consumer spending to drive up GDP and help the economy.