Assessing the level of federal borrowing
The federal government has carried debt throughout virtually all of U.S. history. However, sharp increases in the debt in recent years have led to heightened concern about the level of federal borrowing and the long-term budget outlook.
For example, CBO notes that large amounts of debt diminish the government’s flexibility to address unexpected events, such as recessions, financial crises, and wars, see CBO's, Federal Debt and the Risk of a Fiscal Crisis.
Key considerations in assessing the level of federal borrowing are the magnitude of federal debt relative to the size of the nation's economy and the direction in which the level of federal debt is heading. Indicators to assess the level of federal debt include:
- The ratio of debt held by the public to gross domestic product (GDP), A commonly used measure of domestic national income. GDP is the value of all goods and services produced within the United States in a given year and is conceptually equivalent to incomes earned in production. It is a rough indicator of the economic earnings base from which the government draws its revenues.
- Interest costs as a share of federal revenue
- The fiscal gap.
Debt to GDP Ratio measures the amount of debt held by the public in relation to the nation's income. GDP is the value of all goods and services produced in the United States in a given year. The dollar value of debt is difficult to interpret absent some sense of the size of the economy supporting it. The level and future direction of the ratio of a nation's debt held by the public to its GDP are widely used as benchmarks for assessing that nation's fiscal condition.
Interest Costs as a Share of Federal Revenue is the share of federal revenue absorbed by interest payments to service the federal debt each year. This is an important indicator of the federal resources needed to finance past decisions. Paying interest reduces resources available for other uses. Net interestPrimarily interest on debt held by the public. In addition to interest on debt held by the public, the government also earns some interest from various sources and pays interest for purposes other than borrowing from the public. These amounts are only a small portion of net interest and, taken together, slightly reduce its total. is primarily interest paid on debt held by the public. In recent years, the federal government has been able to borrow at historically low interest rates, but interest rates are expected to increase as the economy recovers.
Source: GAO analysis of data from the Office of Management and Budget.
Notes: Data from Budget of the United States Government for Fiscal Year 2014-Historical Tables.