How can we measure the debt?
The federal government has carried debt throughout virtually all of U.S. history. However, debt held by the public was equal to 77 percent of
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. at the end of fiscal year 2016, which is relatively high compared to the historical average of 44 percent of GDP since 1946. This has led to heightened concern about the level of federal borrowing and the long-term fiscal outlook.
For example, the Congressional Budget Office (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 2016 Long-Term Budget Outlook).
Key indicators to assess the level of federal debt include:
- the ratio of debt held by the public to GDP
- interest costs as a share of federal revenue, and
- 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 period. The dollar value of debt is difficult to interpret absent some sense of the size of the economy supporting it. The ratio of a nation's debt held by the public to its GDP and its likely future direction 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 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, such as interest paid on student loans, 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. payments on 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. In recent years, the federal government has been able to borrow at historically low interest rates, but interest rates are expected to increase in the coming years.
Source: GAO analysis of data from the Office of Management and Budget, Budget of the United States Government for Fiscal Year 2017-Historical Tables; and the Congressional Budget Office, Budget and Economic Outlook: 2017 to 2027 (January 2017, Supplemental Data).
The fiscal gap is the difference between revenue and program spending—that is, spending other than net interest payments—that would need to be closed immediately and permanently to hold debt constant as a share of GDP. Closing the gap would require reductions in program spending, increases in revenue, or a combination of the two. For more information on the fiscal gap, see Fiscal Outlook: Federal Fiscal Outlook.