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What is Federal Debt?


The term 'Federal Debt' is included in the Economics edition of the Financial Dictionary. Get yours now on mazon in ebook or paperback format. Read more here...

The federal debt is also known as the national debt. This represents the entire dollar value of the money which the U.S. federal government has borrowed from its various creditors over the years. Creditors to the government are made up of all governments, businesses, individuals, and other national and international entities which own the debt instruments of the U.S. government.

This national debt has resulted from numerous government deficit budgets where they spent more than they earned in revenues. It is important to realize that this federal debt never includes any of the money owed by municipal or state governments, companies, or individuals. Instead it is the total of all federal government outstanding obligations. This figure contains not just the money the federal government originally borrowed. It is also made up by the interest amounts that it has to pay back with the borrowed funds.

Governments fall into debt when they are not able to bring in sufficient revenues to pay for their expenses on a variety of government programs. This includes military spending and domestic programs such as retirement benefits, Medicare, welfare, and constructing bridges and roads. Revenues are derived from a number of sources. These are made up of personal income and corporate taxes as well as government fees on things like passports, cigarettes and alcohol, and national park admissions fees.

For 2016, the national debt had risen to an enormous amount of greater than $19 trillion. As a percentage of GDP this is over 105%. It has rapidly increased from the years 2006 to 2016, as in 2006 the debt came in at less than half as much at $8.4 trillion. This represented only 66% of the national GDP at the time. Because of this dramatic and ongoing increase, the debate is always heated regarding what should be done with the national debt. Many individuals and observers like the Congressional Budget Office feel that the debt needs to be paid down. Others argue that the debt proves to be a needed catalyst to keep up economic growth.

The debt has come from successive increases in the federal government’s annual budget deficit. These annual deficits represent the amount of additional money the government spends over what they take in for receipts. All of these deficits combined together plus interest paid equal the national debt.

When investors see the debt grow higher and anticipate that there will be greater levels of inflation, they become concerned about the value of their debt holdings. Some economists have conjectured that the government only intends to inflate away the value of the debt over time. This is why debt holders can ask for higher interest rates when they make future loans to governments they suspect of inflating away their debts.

Federal surpluses can be used to pay down the federal debt. This has happened on rare occasions. Since World War II, the federal government has only managed to run less than 10 such surpluses. President Harry Truman was the first to turn the government finances around after President Franklin Roosevelt’s years of deficits. President Truman had surpluses in 1947, 1948, and 1951.

President Dwight Eisenhower also managed to run smaller surpluses in 1957 and 1958. There was not another government surplus for more than forty years until 1998 when President Bill Clinton signed a deal with Congress that achieved an $87.9 billion surplus. This surplus grew to $290 billion by 2000.

The last surplus came under President George W. Bush who had a $154 billion carryover surplus in 2001. On these rare occasions, the Federal government was able to pay down the federal debt temporarily. These surpluses were followed by half a trillion to trillion dollar deficits per year for most of the next decade.

The term 'Federal Debt' is included in the Economics edition of the Financial Dictionary. You can get your copy on mazon in Kindle or Paperback version. See more details here.