Fiscal Policy and Government Debt
How government spending, taxes, and borrowing work at the scale of the economy: deficits and debt, how the US numbers have moved, what the debt costs to carry now that interest rates have risen, the arithmetic that decides whether debt grows faster than the economy, and what it all means for investors.
The short version
A government runs a deficit when it spends more than it collects, and its debt is the pile of past deficits. The US federal deficit reached 14.5% of GDP in 2020, the largest since World War II, and was 5.8% in fiscal 2025. Total federal debt passed $40 trillion in 2026. With interest rates up from their pandemic lows, interest outlays rose from 1.5% of GDP in fiscal 2021 to 3.15% in 2025, matching the highest level on record. Whether debt grows faster than the economy depends on the gap between the interest rate and the growth rate, and on the deficit before interest. For investors, government borrowing affects the supply of Treasuries, interest rates, and inflation risk.
By the end of this lesson, you'll be able to
- Distinguish deficits from debt, and describe how US deficits, debt, and interest costs have moved
- Use the debt-dynamics arithmetic to show when debt grows faster than the economy
- Explain how fiscal policy can affect interest rates, inflation, and investors
Why this matters
The federal government borrows on a vast scale, and it issues the Treasuries that every bond lesson in this course has used as its yardstick. How much it spends, taxes, and borrows affects demand in the economy, the supply of Treasury securities, and possibly the level of interest rates and inflation. Growth, Inflation, and Interest Rates covered monetary policy, the central bank's half of economic policy. This lesson covers the government's half, Fiscal policy. Government decisions about spending and taxes, and so about how much it borrows. Glossary, and the debt it leaves behind.
Deficits and debt
A Budget deficit. The amount by which a government's spending exceeds its revenue in a year. A surplus is the reverse. Glossary is the amount by which spending exceeds revenue in a year. The National debt. The total a government owes from past borrowing: the accumulation of its deficits, less its surpluses. Glossary is what's owed as a result of past deficits, less any surpluses. A deficit is a flow, like a household's overspending this year. The debt is a stock, like its credit card balance. Shrinking the deficit slows the growth of the debt. Only a surplus reduces it.
Both are usually stated as a share of GDP, from GDP and How It Is Measured, because what matters is the burden relative to the economy that has to carry it.
US deficits
| Fiscal year | Surplus (+) or deficit (−) |
|---|---|
| 1943 | −26.9% |
| 2000 | +2.3% |
| 2019 | −4.6% |
| 2020 | −14.5% |
| 2021 | −11.7% |
| 2022 | −5.3% |
| 2024 | −6.2% |
| 2025 | −5.8% |
Office of Management and Budget figures.1
The 2020 deficit of 14.5% of GDP was the largest since the World War II years of 1942 to 1945.1 Part of any recession's deficit happens without a decision: tax revenue falls as incomes fall, and spending on unemployment and other support rises. These Automatic stabilizers. Parts of the tax and spending system, such as income taxes and unemployment benefits, that cushion the economy without new decisions: revenue falls and support rises when the economy weakens. Glossary cushion a downturn and shrink as the economy recovers. The rest comes from deliberate choices to cut taxes or raise spending. What's notable in the recent figures is that the deficit stayed near 6% of GDP in 2023 to 2025, years with no recession on the official record,2 when stabilizers would normally be shrinking it.
US debt
On 13 October 2026, total federal debt outstanding was $40.34 trillion. Of that, $32.48 trillion was held by the public, meaning investors, banks, foreign governments, and the Federal Reserve, and $7.86 trillion was held by federal government accounts, such as trust funds.3 The debt held by the public is the part that has to be financed in markets.
Measured against the economy, total federal debt was about 63% of GDP at the end of 2007 and 106% at the end of 2019. It peaked at 133% in the second quarter of 2020, when debt jumped and GDP fell, and stood at about 123% in early 2026.4
The rest of this lesson is for members
Still to come in this lesson: What the debt costs, When debt grows faster than the economy, What it means for investors, the key takeaways, and 2 quiz questions with explanations.
Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.
Go deeper
- Money, Banking, and CreditEconomics for Investors (depth track)
- The Yield Curve in DepthFixed Income in Depth (depth track)
- Treasury Auctions and Bill YieldsFixed Income in Depth (depth track)
- Growth, Inflation, and Interest RatesPart 6: Strategy, Behavior, Accounts, and Taxes
Notes and sources
- Federal Reserve Bank of St. Louis (FRED), from the Office of Management and Budget and the Federal Reserve Bank of St. Louis. Federal Surplus or Deficit as Percent of GDP (FYFSGDA188S) and Federal Outlays: Interest as Percent of GDP (FYOIGDA188S), by fiscal year. Checked 2026-10-14. Back to text
- National Bureau of Economic Research. US Business Cycle Expansions and Contractions. Checked 2026-10-14. Back to text
- U.S. Department of the Treasury, Fiscal Data. Debt to the Penny (record for October 13, 2026). Checked 2026-10-14. Back to text
- Federal Reserve Bank of St. Louis (FRED), from the Office of Management and Budget and the Federal Reserve Bank of St. Louis. Federal Debt: Total Public Debt as Percent of Gross Domestic Product (GFDEGDQ188S), quarterly. Checked 2026-10-14. Back to text
- Federal Reserve Bank of St. Louis (FRED), from the U.S. Bureau of Economic Analysis. Federal government current expenditures: Interest payments (A091RC1Q027SBEA), quarterly at an annual rate. Checked 2026-10-14.