What’s Different About Today’s Government Deficit and Debt?

There’s been a lot of talk about President Donald Trump’s One Big Beautiful Bill and with it, growing debate over just how scary humongous the government’s deficit and debt really are.        

At the same time, almost everybody understands that the real purpose of President Donald Trump’s mega-bill is to cut taxes for the rich and pump up the already bloated U.S. military budget, while cutting funds for programs like Medicare and food stamps that support working people and the poor. This is fully in the spirit of the 2017 tax cuts that President Trump passed during his first term.  Under that measure, in 2019 the poorest 20% of households received an average of $100 in tax savings, while the richest 10% received $55,000.

As of today, the U.S. government’s current deficit and debt are indeed  currently at unprecedented levels for peacetime—once we account for them appropriately. Governments run fiscal deficits when their annual spending exceeds tax revenues and they then take on debt by borrowing on financial markets (mostly by issuing Treasury bonds) to make up the difference. To measure the current debt and deficit accurately, it’s important  to distinguish between two distinct circumstances under which governments run fiscal deficits. The first is when the government injects large-scale spending into the economy to prevent a severe downturn (what is termed a “counter-cyclical” deficit). The second is when the government is spending more than it receives in tax revenues, even when the economy is not facing a collapse (this is called a “structural” deficit). 

We also need to scale the size of these annual deficits, as well as the accumulated debts resulting from the annual deficits, relative to the overall level of economic activity at any given time. The economy’s Gross Domestic Product (GDP) is a useful scale for this purpose. This is true even while GDP fails to account for many crucial economic activities, such as unpaid household labor and the environmental costs of burning fossil fuels.  

Focusing first on counter-cyclical deficits, let’s go back to the financial meltdown and Great Recession of 2008–2009. To fight the recession, the federal deficit ballooned to $1.4 trillion, which was then about 10% of the country’s GDP. This was nearly six times larger than the average U.S. deficit, which was 1.7% of GDP from 1950–2007. The Great Recession was severe, marked by an unemployment rate of 10% and a slow, painful recovery. Yet, we didn’t experience anything like the Great Depression of the 1930s, which led to an average unemployment rate of 17.2% from 1931–1940.

This was even more emphatically the case during the 2020–2021 Covid-19 pandemic and aftermath. One month after the lockdowns began in March 2020, U.S. unemployment rose from 3.5% to 14.8%. A global economic collapse was unfolding. But the U.S. government borrowed $3.1 trillion and injected those funds into the economy, producing a fiscal deficit of 15% of GDP—which was much larger than even the Great Recession figure as a share of GDP. Yet again, we avoided a 1930’s-level collapse. It’s true that this massive increase in the government’s deficit spending contributed to the post-pandemic increase in inflation in the United States and abroad. But that global inflationary spike mostly ended within 18 months. 

The situation is different today. We have been out of the Covid-19 recession for over three years. And still, the government’s deficit is at 6.3% of GDP. That is less than during the 2008–2009 or 2020–2021 crisis years. But we are not now experiencing any kind of comparable economic crisis. And yet, this 6.3% of GDP budget deficit is now larger than at any other non-recession period since World War II. The government’s accumulated debt is also now at a peacetime high of 97% of GDP. This is nearly three times higher than the 35% of GDP figure in 2007 prior to the Great Recession.                    

The most critical point is that the current deficits are not serving to prevent an economic collapse. Instead, they are simply helping rich people get richer, while attacking the living standards of working people and the poor, and also continuing to lavish exorbitant funds on the military.

Is the government about to go broke as a result? The most important indicator here is how much we have to pay to cover these debts—the interest that the government pays on U.S. Treasury bonds. In 2024, the government paid 3.8% of GDP in interest to its creditors. That is below the 4.9% of GDP that we paid during the presidencies of Ronald Reagan and George H.W. Bush. We did not hear Reagan, Bush, or any other Republican politician of that era scream then that the sky was falling. Nor did the sky fall. 

Still, the government’s 2024 interest payments totaled to more than it spent last year on education, scientific research, public infrastructure, environmental protection, and global humanitarian aid combined. The government’s creditors are mainly rich individuals and foreign governments. The government does have the means to continue forking over these interest payments to its creditors. Yet, by running large fiscal deficits now, when we are not fighting a recession, the government is effectively paying rich people to lend it money rather than making them pay their fair share of taxes. Correspondingly, the government’s interest payments that are now lining rich people’s pockets—and will flow into these pockets even more abundantly if President Trump’s Big Beautiful Bill becomes law—are also hundreds of billions of dollars that could otherwise be devoted to public health, public education, and building a green economy.