By Gustav Graner.

A first-principle explanation of the national debt of America and why it has become one of the biggest talking points in American politics.

Last month Elon Musk went on a surprising barrage towards President Trump just days after he had been given the golden key to the White House, and ended his term as the chief of DOGE (Department of Government Efficiency). Why? Seemingly, it was all because of the so-called “Big, Beautiful Bill” (the BBB) — a Trump-backed federal budget proposal for next year, which was signed into law on the 4th of July [1] [15].

The BBB is a “big” deal, both literally and figuratively. The proposal includes many of Trump’s popular campaign promises amongst conservatives: It will make the huge 2017 Trump tax cuts permanent (which are due to expire at the end of the year), remove tax on tips, increase the budget for border patrol and increase the requirements for people to receive Medicaid [2]. What many republicans oppose in the bill however is its projected effects on the federal debt. Elon Musk echoed senators’ worries when saying that “a bill can be either big or beautiful, however it cannot be both” [3]. The bill is estimated to add 3.3 trillion USD in government debt over the next decade, on top of what is already estimated to be added, according to the Congressional Budget Office* [4]. However this number is hard to grasp without context — so to better understand it, let’s go back to government finance basics. 

Every year when the government does its budget there are two general numbers which are the most important to consider: the expenditure, and the revenue. When spending exceeds revenue, there is a budget deficit. The government pays for their deficit by selling bonds and treasuries in financial markets, which is what the American federal government has done for 46 of the last 50 years, adding to the total government debt [12]. 

The nominal American debt has increased drastically in the last 50 years, from 893 billion USD in 1980 to 37 trillion USD today, however the statistic which truly matters when it comes to debt is debt-to-GDP [5]. To measure the “real” level of government debt, economists put it relative to (divided by) the GDP of the country in question, to get a percentage (the debt-to-GDP). The average such percentage amongst the developed nations in 2023 was 110% according to the UN, and 72% in 2007. The US government debt-to-GDP ratio today hovers around 122% — a sharp rise from 64% in 2007 [6]. 

The development of the debt-to-GDP ratio is influenced by two main components: The budget deficit and the GDP growth. The difference in percentage point between the deficit and the growth rate in any given year will equal the percentage point growth in debt-to-GDP. Hence, growth in debt does not necessarily lead to a growth in debt-to-GDP. For example, between 1960 and 1980 the nominal US debt almost tripled, but the debt-to-GDP ratio fell from around 52% to 30% during the same period [7]. That is because even though the debt was growing, GDP was growing faster.

However, in recent years, America’s ratio of deficit to GDP growth is causing worry among many. In the middle of the 2010s, the deficit was around 3-4% of GDP, compared to a GDP growth around 2-3% per year, resulting in a 1 percentage point addition to debt-to-GDP per year. During COVID on the other hand, in 2020 and 2021, the deficit averaged 13% per year, with an average GDP growth rate of 2% (-2% and +6% respectively). In two years the debt-to-GDP increased by approximately 20 percentage points of GDP — the most in American history when not in wartime. Since then, Americans have had trouble decreasing spending, with the American deficit averaging 6.5% of GDP between 2022 and 2024, compared to an average GDP growth around 2.5% [8] [9]. 

Most are unanimous in that the US will have to decrease, or at least slow down, their increasing debt-to-GDP. Despite increasing government debt being a trend throughout OECD economies, the US has climbed to having the fourth biggest debt-to-GDP ratio in the OECD — they were thirteenth in 2007 [6]. Even so, some nations, in particular Japan, have a significantly higher debt-to-GDP than the US, and are thriving in many metrics. However, Japan has often been seen as a special case in world economics due to their unusually low interest rate (it has not exceeded 0.5% in 10 years, most of the time being negative) [10]. In the case of the US on the other hand, which does not have a similar interest rate history, if the debt is not addressed, a dangerous and self-perpetuating debt spiral could follow:

The first warning sign would come from credit agencies that will downgrade the American government as lenders. The US government has been considered one of the safest borrowers with a triple A rating — and they still are, they have never defaulted on a loan — however during the last 10 years all major credit rating agencies have downgraded their status one-by-one [11]. Thus, US government interest payments will go up, as the demand for US government bonds will decrease. This will lead to a spiral where they have a higher interest rate and more debt, causing the percentage of federal spending which goes to servicing debt, which is already at 16% today, to gradually increase to unsustainable levels [12]. And how will this debt service be financed? By taking on more debt — and voilà, a spiral.

Getting to this point would have horrendous consequences for the US but also for finance all over the world, as a lot of the American debt is owned by foreigners [13]. As so, something will have to be done, especially considering trends of aging populations which will lead to a bigger healthcare budget in the future. That trend will also lead to a shrinking workforce, meaning a smaller taxbase and less government income, all things else equal. There are a few schools of thought of how to deal with this issue, which touch upon the very foundational differences between conservatism and progressivism:

Conservatives traditionally believe in a small and lean government, with low taxes to spur growth, and low spending to finance the tax cuts. In theory increased growth, lower revenue and lower spending will decrease GDP-per-capita, as the economy “grows” itself out of debt. This is exactly what can be seen in the Trump budget with a 1.5 trillion USD decrease in actual spending over a decade, whilst there are tax cuts for 4 trillion USD over the same period. Recently, the Trump administrations have also looked to increase tariffs and activate the US balance sheet in order to draw more revenue — how that goes remains to be seen. The problem with this policy is that whilst the philosophical concept of cutting spending is somewhat popular, it is very unpopular in reality, and it will hurt. An example of this is the implication of the major cuts done to Medicaid in the current bill — resulting in 11 million Americans losing Medicaid support [14]. 

Progressives, on the other hand, have a vastly different view of government — and hence debt. They believe in a big government with high taxes, in particular higher taxes for corporations and high-net-worth individuals, compared to today’s level. The thought is that this will increase the revenue of the state, meaning a reduction of the deficit without the government having to cut any spending. The critique of it is that increased taxes will slow growth. 

A third thought of how to lower debt-to-GDP is that America can grow their way out of debt without doing much — due to AI. Some suggest AI will increase productivity, in turn causing immense organic economic growth, resulting in the ability to keep a high level of government spending. Such ideas have been perpetrated mostly by conservatives, but across ideologies. It is an unlikely scenario, since the American economy has not grown at a consistent rate above 4% per year since the late 1990s, however in pushing this narrative politicians do not have to deal with the government deficit in the present [8].

The most likely scenario is that the AI revolution contributes growth, but not enough to cover the 6-7% deficits the US has found themselves in. Given that assumption, the Americans will have to find other ways to decrease their deficit, and with the current administration that route will be cutting taxes and spending. For this to work however, one cannot take the carrot without the stick: There cannot only be tax cuts, but there must also be spending cuts. As such, a battle in Washington sometime in the near future is expected, between representatives who are willing to support less federal money for their constituents, and those who are not. This will however be an uphill battle for the administration. There are few people who want to vote themselves less money, nor increased taxes — the question is how big the American debt has to be in order for public opinion to change that?

 *It should be noted that this number is based on the assumption that the tax rate would go back to “normal” levels if the bill is not passed. Maintaining the tax cuts in and of itself adds around $4.5 Trillion to the debt over the next decade.

Edited by Maxime Pierre.

References

[1] “Timeline: Elon Musk’s Relationship with Trump.” CNN. https://edition.cnn.com/business/timeline-elon-musk-trump-x-dg. Accessed June 24, 2025.

[2] “Trump’s Budget Proposal Faces Backlash.” BBC. https://www.bbc.com/news/articles/c0eqpz23l9jo. Accessed June 24, 2025.

[3] “A Bill Can Be Big or Beautiful, Not Both: Elon Musk Mocks Trump’s Tax Bill.” Livemint. https://www.livemint.com/news/us-news/a-bill-can-be-big-or-beautiful-not-both-elon-musk-mocks-donald-trump-s-tax-bill-11748436617814.html. Accessed June 24, 2025.

[4] Statista. (2024, April 12). Estimated cumulative federal deficit caused by the “One Big Beautiful Bill Act” in the United States from 2025 to 2034 [Chart]. Statista. https://www.statista.com/chart/34583/estimated-cumulative-federal-deficit-caused-by-the-one-big-beautiful-bill-act/  

[5] “U.S. National Debt Clock.” USDebtClock.org. https://www.usdebtclock.org/. Accessed June 24, 2025.

[6] “General Government Debt.” OECD Data. https://www.oecd.org/en/data/indicators/general-government-debt.html?oecdcontrol-3122613a85-var3=2023. Accessed June 24, 2025.

[7] “US Debt to GDP Ratio.” LongTermTrends. https://www.longtermtrends.net/us-debt-to-gdp/. Accessed June 24, 2025.

[8] “United States GDP Growth (Annual %).” The World Bank. https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=US. Accessed June 24, 2025.

[9] “United States Government Budget.” Trading Economics. https://tradingeconomics.com/united-states/government-budget. Accessed June 24, 2025.

[10] “Japan Interest Rate.” FXEmpire. https://www.fxempire.com/macro/japan/interest-rate. Accessed June 24, 2025.

[11] “Moody’s Downgrade Highlights U.S. Fiscal Risk.” Peter G. Peterson Foundation. https://www.pgpf.org/article/moodys-downgraded-its-us-credit-rating-and-warns-that-recent-policy-decisions-will-worsen-fiscal-outlook. Accessed June 24, 2025.

[12] “National Debt Explained.” U.S. Department of the Treasury. https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/#:~:text=As%20of%20May%202025%20it,spending%20in%20fiscal%20year%202025. Accessed June 24, 2025.

[13] “Who Owns the National Debt?” Peter G. Peterson Foundation. https://www.pgpf.org/article/the-federal-government-has-borrowed-trillions-but-who-owns-all-that-debt/. Accessed June 24, 2025.

[14] “House Bill Analysis Confirms Devastating Coverage Losses.” Medicare Rights Center, June 5, 2025. https://www.medicarerights.org/medicare-watch/2025/06/05/official-house-bill-analysis-confirms-devastating-coverage-losses. Accessed June 24, 2025.

[15] Restuccia, A. (2024, April 10). Trump signs ‘Big, Beautiful Bill’ into law. The Wall Street Journal. https://www.wsj.com/politics/policy/trump-signs-big-beautiful-bill-into-law-302edba6

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