What is the national debt?

The United States has run a national debt for virtually all its existence. Most of the debt has accumulated over the last 40 years — as of April 2024, the country’s total debt exceeded $34 trillion, more than seven times 1984’s debt.¹ What is the national debt, and how does it differ from a budget deficit? Who does the federal government borrow money from? Where does the debt ceiling fit into the equation? Let’s explore these and other questions.

What is the national debt?

The national debt refers to the total amount of money that the US government owes its creditors. The federal government takes in revenue through taxes and spends it on Social Security, national defense, Medicare, and various other expenses to keep the country running. When expenses exceed revenue, the shortfall gets added to the debt total.

The national debt can be divided into two categories: public debt and intragovernmental debt.

• Public debt, which accounts for roughly 80% of the total, is owed to investors. Those investors include foreign governments, mutual funds, pension funds, and individuals among others. The Federal Reserve owns part of this public debt.²
• Intragovernmental debt accounts for the other 20%. This is debt that the US Treasury owes other federal agencies. It’s held in trust funds, with Social Security accounting for the largest chunk.³ Simply put, this is money the government owes itself.

What is a budget deficit?

A budget deficit is the difference between what the federal government spends and collects in a given fiscal year. The size of a budget deficit can vary from year to year based on government spending policies, tax rates, and economic conditions.

The government borrows money to finance the shortfall, and whatever is borrowed gets added to the total debt going forward.

How does the federal government borrow money?

The federal government borrows money from the public and itself through marketable and non-marketable securities.

• Most are marketable securities — like Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities — that can be traded to other investors.
• Non-marketable securities such as Savings Bonds, Government Account Series, and State and Local Government Series cannot be traded with other investors.⁴

The government borrows money by issuing securities that individuals and organizations buy, and it uses that money to pay bills and fund federal programs. At some future date, it pays back the loan with interest. “Backed by the full faith and credit of the United States government,” Treasury securities are seen as among the safest and most liquid assets in the world. They mature at various times and the interest income is exempt from state and local taxes. Most of these securities can be bought and sold on financial markets.⁵

What are the different types of government securities?

Treasury bills

Often referred to as T-bills, these are short-term debt securities issued by the US government. Treasury bills are sold at a discount to their face value and mature in one year or less, at which point the holder is paid the face value.

Treasury notes

These are intermediate-term debt securities issued by the US government with maturity periods ranging from 2 to 10 years. Treasury notes pay interest semi-annually to the note holder and deliver the face value of the note upon maturity.

Treasury bonds

These are long-term debt securities issued by the US government with a maturity period of more than 10 years, typically 20 or 30 years. Treasury bonds pay semi-annual interest to the bondholder and return the bond’s face value at maturity.

Treasury inflation-protected securities

Known as TIPS for short, these are a type of marketable Treasury bond that serve as an inflation hedge. The principal adjusts with the Consumer Price Index — a common measure of inflation — while the interest rate, paid semi-annually, stays fixed. TIPS are issued with maturities of 5, 10, and 30 years, after which investors receive either the adjusted principal or the original principal, whichever is greater.

Savings bonds

Unlike other types of bonds, savings bonds can’t be bought or sold in secondary markets. This long-term investment can be purchased in various denominations and earn interest for up to 30 years.

What is the debt ceiling?

The debt ceiling is a legislative limit set by Congress on how much national debt the Treasury can borrow. When reached, the Treasury can't issue any more Treasury bills, bonds, or notes. It can only pay bills through tax revenues, a drawdown of cash balances, and the use of other “extraordinary measures.”

Federal spending often exceeds tax revenues, so reaching the debt ceiling could eventually lead the government to default on its obligations. This scenario could have serious economic consequences. Congress has historically chosen to raise the debt ceiling, which doesn't authorize new spending, but rather lets the government pay for expenditures Congress has already approved.