As government deficit spending diminishes economic growth, it pushes the nation’s economic output, the GDP, well below its potential.
The U.S. national debt has crossed an ominous threshold, rising above 100 percent of national gross domestic product, or GDP. This is the first time since World War II that debt has been so high a percentage of national economic output.
That is a big problem because the federal debt undermines the value of the U.S. dollar and diverts investment from the wealth-creating private sector. The rising debt and its pressure on the nation’s economy will force the federal government and Federal Reserve, the latter led by newly confirmed chair Kevin Warsh, to make hard decisions they have put off for decades.
Many among the public will suffer as a result, especially the elderly, who rely on Social Security and Medicare.
GDP is the total amount of spending in the nation’s economy. At the end of March, federal debt held by the public was $31.265 trillion, and GDP in 2025 was $31.216 trillion.
The rise of debt-to-GDP is accelerating because the federal budget is structurally unsound. The government “is spending $1.33 for every dollar it collects in revenue, and the budget deficit this year is projected at $1.9 trillion,” the Wall Street Journal reports.
Over the past two decades, the annual federal budget deficit has expanded far beyond what was normal from 1950 to 2007, which was about 25-45 percent. The federal debt quadrupled from 1970 to 1990, tripled from 1990 to 2000, and has doubled in each decade throughout this century.
Federal revenue has continued to increase. The problem is that spending is rising much more rapidly, pushing the annual budget deficit up to almost 6 percent of GDP, accelerating the increase in the national debt. As a result, the debt-rise trendline is becoming much steeper.
This is the first time the nation’s debt-to-GDP ratio has been so high without a major crisis such as a war or pandemic. There is no excuse for the recent increases in the federal debt. The federal deficit decreased by 63 percent between 2020 and 2022, erasing all the pandemic increase. Discretionary spending hikes have pushed the deficit up since then.
The numbers show that the federal government has spent the period since 1974 borrowing enormous amounts of money to spend on vote-buying with ever-greater income-transfer payments.
This politically motivated overspending has eroded the value of the U.S. dollar through inflation, which reached a crisis in 2021 through 2023 when the Congress and President Joe Biden expanded spending rapidly while greatly tightening federal regulation of the economy. Economic growth has slowed.
As government deficit spending diminishes economic growth, it pushes the nation’s economic output, the GDP, well below its potential, which further increases the deficit and debt as a percentage of GDP. The only thing that can stop such a fiscal whirlpool is a major cut in spending. That is as true for governments as it is for any household or business.
To be sure, the debt-to-GDP ratio is not some sort of magic number. GDP measures economic activity, not wealth, and net worth is the real measure of the capacity to carry debt. The United States remains the world’s wealthiest nation by far, holding 35 percent of the world’s net worth. Other than China at 19 percent, no other country has even five percent of global wealth.
The U.S. federal debt amounts to 5 percent of the nation’s total assets, according to economist John Rutledge. Although that is far, far more debt than is either advisable or justifiable, it is a little less than half the average American household’s debt, which Rutledge calculates at 10.2 percent. As Rutledge notes, “the future of our economy will be determined by the stability of our enormous balance sheet.”
That is true. Free people can create wealth by using limited natural resources and unlimited human ingenuity. The United States has an abundance of both.
Government, by contrast, can only take from what the people build, and every government extraction or regulatory impediment reduces that output. Rutledge believes that we are “about due” for a credit crisis, as do I. Americans, however, always find a way through these government-imposed predicaments as people readjust their priorities to realign with reality.
The real crisis that lies ahead is not bankruptcy of the American people but an insolvent federal government.
That is good news. If the federal government loses its ability to borrow money ever-more frenetically as massive sovereign debt pushes up interest rates, the government’s ability to borrow will collapse a few years from now, at most.
The ensuing choice between repudiation of national debt (directly or through very high inflation) or huge spending cuts will disrupt the economy badly and diminish people’s reliance on the national government.
The American people, however, can and will survive and thrive, probably with a much smaller government on the other side of the commotion. That last part sounds beautiful.
We could avert a fiscal crisis by cutting spending and regulation. We will not do so, however, because presidents and members of Congress cannot bear the idea of being held responsible for tens of millions of Americans’ loss of freebies paid for by other taxpayers. No number of dire warnings and symbolic thresholds will change that.
S.T. Karnick is a senior fellow at The Heartland Institute and author of the Life, Liberty, Property weekly e-newsletter.
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