As you grow older, you become more self assured, knowledgeable and more independent – able to make many decisions on your own. At some point in your teenage years, you may come to believe in your infallibility, and how correct you are in all things. As you get older, life has a way of teaching you new lessons, and if we were smart and true to ourselves there were probably lessons that our parents tried to teach us many years before and we were too smart at the time to listen. When you become a parent, you come to realize many more of those lessons after the fact. One big lesson for parents is that you can’t make decisions for your children all of the time, for one they won’t always listen, and two – they need to learn on their own. You try to protect them from the things that will really hurt them or having lasting effects, but sometimes a little blood and skinned knees can be way more instructive than any parental chat.
“When I was a boy of fourteen, my father was so ignorant I could hardly stand to have the old man around. But when I got to be twenty-one, I was astonished at how much the old man had learned in seven years.”
Mark Twain
Wisdom of the Mom: What we can learn from mothers
One lesson we learned, and we didn’t even realize we were being taught, was the “You Slice, You Choose” game. The “game” was simple, usually there was something desirable like a Pie and your mother would designate one person to slice, and another person got to choose which slice to take. Simple, but devious – at first glance without a lot of thought a young lad may think if I get to slice, I can slice a bigger piece of the pie. A wiser, more experienced child will realize that any deviation by the slicer from the center was a gain for them as they would invariably choose the larger slice. Overtime, as everyone knew the game the slices became more and more even, and the “game” self enforced fairness without any policing or intervention from parental units. After a while, you could swear that each slice was done by a computer aided laser in the planning and precision of the pie slice so perfectly even down the middle. Many years later, you marvel at the wisdom of mothers and wonder what other ancient mysteries and riddles could these geniuses have solved if their life mission wasn’t wasted helping you slice pie.
Mom and the Budget
Every year now it seems like the Federal Budget is now in play as a game piece to be negotiated by both parties trying to gain advantage over each other. Even though everyone knows the dates and when the deadline is, it always seems to go right up to the end, and in this case over the deadline. Such is the case in the partisan environment we live in today. However, I’m struck that it’s really nothing more than a high stakes game of “You Slice, You Choose.” That may over simplify it by quite a bit, but the fundamentals are the same.
Pie Analogy
Our Federal Revenue is the ingredients for the pie. Our Federal budget is the size of the pie. Some years the pie will be larger than what you can eat, known as a budget surplus, and you can put some in the fridge for later. Other years you can borrow extra ingredients to have a bigger pie now at the expense of smaller pies in later years, known as a budget deficit. Much like pies in our household, there was never enough. Since 1901 we’ve had 92 years of budget deficits.
Figure 1
Our debt keeps growing, as well as the interest on the debt. Each year eating more and more pie.
Pie Dynamics
Before you even slice the pie, you realize several pie dynamics are at play. The amount of ingredients each year, the more ingredients the bigger the pie – so as Revenue grows, so does the size of the pie. The size of pie we make is dependent on the quantity of ingredients we have, and if we choose to leave some pie for later (surplus), or we decide to borrow ingredients from the future (deficits) with the potential consequence of having to reduce the size of future pies.
Pie Slicing
After you understand the pie dynamics, you can begin the process of slicing. However, before you slice you want to have any idea of how you want to divvy up the pie, and knowing with the Federal Budget almost 3/4’s (74%) of the pie is already gone before you slice it allocated to Mandatory and Net Interest components. The Net interest is all the extra pie we had in previous years. The more we add to the deficit, the larger it get. As it keeps growing, the smaller and smaller the pie available is in the future. Unless new laws are passed, the debate is in the quarter of the pie designated as Discretionary. However, even many of those don’t feel discretionary like National Defense – you could cut it back, but you probably aren’t going to eliminate it.
Figure 2
Pie – Choosing your Slice
So the only thing left is tough choices. Slicing can be a painful process, because when it comes time to choose – you realize that something you may have wanted more of shrunk, and something you wanted less of grew and you are stuck with that choice. Unlike in the family edition of the “You Slice, You Choose” game, both parties participate in the slicing and choosing. There is no self reinforcing fairness mechanism other than the active participation of engaged and informed citizens. This is the game Congress must play each year.
Pie in the Sky
Increasingly, people bring up MMT (Modern Monetary Theory). Using our pie analogy, according to MMT as long as inflation is in check, your pie can be as big as you want it to be. We wish these Economists were available to instruct our parents. Alas, in our household there was no magic infinitely growing pie, just tough choices. Until such time as an infinite pie becomes available, we’ll have to face touch choices as a country.
You Slice, You Choose
Summary
The Federal Budget is much more complicated, and the outcomes and consequences much more serious than a game of “You Slice, You Choose” but the lessons from Mom are none the less instructive. We all have to choose between tough choices, we all have to make reasonable assumptions and trade offs, and create mechanisms for fairness and balance that reinforce themselves automatically and fairly. In the game of life understanding Government Financial Literacy gives us the tools to understand the rules of the game, how to participate, and understand the dynamics, and trade offs that must be made in order for all of us to thrive. We learn many lessons in life, some of them stick with you. Thanks mom, I miss you every day.
As of 2:01 am ET, Oct 1, 2025 the Federal Government is “shutdown.” That may sound scary, especially for those who depend on Federal services, however a Federal shutdown is not just an on/off switch. Many parts of the Federal Government, and all State, and Local Government remain open. So basically, a Federal “Shutdown” doesn’t mean the government disappears. It means Congress didn’t pass the annual funding bills (or stop-gap spending measures) on time, so some activities must pause until funding resumes. This happens from time to time and is temporary. This article provides a simple guide to help you understand what continues, what closes, and what runs at reduced service. Where helpful, each item notes whether it’s Mandatory (paid automatically by permanent law), Discretionary (normally needs a yearly appropriation), or Fee-funded/Other (runs on fees or multi-year/no-year funds). For a deeper background on spending types, see our explainer on mandatory vs discretionary vs entitlements, and for how funding normally works, see our Federal Budget process overview.
Guiding Government Principles
Here are the rough guidelines for how the Federal Government operates. About 70% of the budget is mandated by statute (law), and continues automatically. The Discretionary budget is what is in jeopardy during a shutdown, and in general most critical functions are setup to continue.
By law, Federal agencies can’t spend money without an appropriation (Antideficiency Act). Limited exceptions allow operations that protect life and property, fulfill constitutional duties, or are otherwise authorized by law.
Programs with permanent (mandatory) funding, multi-year/no-year money, or legally available fees can generally continue. Each department publishes a “lapse plan” that spells this out.
Figure 1 Source: CBO
OPEN (operating normally or near normal)
Social Security, SSI, Medicare, Medicaid, and CHIP (Mandatory)
Monthly benefit payments continue because these programs are funded by permanent law and trust funds, not the annual spending bills at issue. Field offices and call centers may be short-staffed, so expect slower customer service, but checks and covered health services continue. [1][2]
U.S. Postal Service (Fee-funded/Other)
Post offices stay open and mail runs on schedule. USPS finances operations mainly through postage and product revenue rather than annual appropriations. [3]
Air Travel Safety and Security (FAA air traffic control; TSA screening) (Discretionary) (excepted)
Flights continue. Air traffic controllers (Federal Aviation Administration) and Transportation Security Administration screeners work to protect life and property. You may see delays if support staff are furloughed. [4]
U.S. Customs and Border Protection continues inspections and tariff collection, the Federal Emergency Management Agency continues disaster payments, and many U.S. Citizenship and Immigration Services functions continue because they’re fee-funded. [5]
Passports and Visas (Fee-funded/Other)
The Department of State can continue a range of consular services funded by fees. Availability varies by embassy/consulate; plan for backlogs. [6]
Internal Revenue Service(Multi-year funds)
The IRS has multi-year funding under recent law and announced it will continue operations at least through the initial business days of the lapse (filing, refunds, enforcement, and phones). If the lapse is prolonged, watch for updated notices. [7]
Active-duty military continue to report for duty. Certain civilian personnel supporting protection of life/property or critical missions also continue; other civilian roles may be furloughed. Pay may be delayed until Congress acts, but operations (training, deployments, ongoing missions) continue under the Department of Defense’s lapse guidance. [8][9]
Debt Service (Mandatory)
Net Interest payments on the National Debt continue by statute, no risk of default.
PAUSED OR REDUCED (still there, but slower or narrower)
National parks, monuments, and public lands (Discretionary)
Many park units aim to keep basic access to open-air areas (roads, trails, memorials) where it’s safe, sometimes using limited recreation fee balances, while visitor centers, tours, and most programming pause. Conditions vary by park; services like trash, bathrooms, and rescues may be minimal. Check your park’s alerts before traveling. [10]
Economic statistics, many Grants, and routine Federal Agency services (Discretionary)
Non-emergency activity at departments such as Education, Labor, Commerce, Environmental Protection Agency, and Interior often scales down: new grants, routine guidance, some inspections, and many back-office services pause or slow until funding resumes. Each agency posts a contingency (“lapse”) plan with specifics. [11]
SNAP and WIC nutrition programs (Primarily Mandatory)
Supplemental Nutrition Assistance Program (SNAP) benefits are generally issued on schedule due to mandatory funding and advance planning; Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) can rely on limited contingency funds but is more vulnerable in a prolonged lapse. Check the U.S. Department of Agriculture updates for your state. [12]
TANF Assistance (Temporary Assistance for Needy Families) (Mandatory)
TANF is a federally funded, state-run program that provides cash aid and work supports to low-income families with children. In shutdowns, states often continue TANF using prior-year federal funds on hand and state “maintenance-of-effort” dollars, but administrative processes at the federal level can slow and a very long lapse can strain state cash-flow. For current status, check your state human services agency and the federal Office of Family Assistance. [13][14]
Federal courts (Fees/carryover & Discretionary)
Federal courts typically remain open initially using fee balances and carryover funds, then tighten operations if a lapse lasts. Check your district/circuit court’s website for local notices (Administrative Office of the U.S. Courts). (General framework summarized in CRS.) [15]
Federal worker pay and services (Varies by function)
Many “excepted” employees work without pay (back pay typically follows under current law); others are furloughed and stop work. The Office of Personnel Management posts guidance for agencies and employees. [16]
CLOSED (fully halted unless tied to excepted activities)
Activities that rely only on annual discretionary funds and are not excepted
Examples include most routine agency trainings, many museum operations, some research labs, and new grant awards. They pause entirely until funding resumes. For program-by-program detail, consult each agency’s posted plan. [11]
Important context (State and Local Government services)
A federal shutdown is about federal appropriations. State and local governments remain open, and community services like most public schools, city services, state colleges, and local public safety continue to operate. Some state/local programs that depend heavily on federal grants can feel indirect effects if a lapse lasts, but day-to-day state/local government is not shut down by a federal lapse. [17]
Quick reference during Shutdown
Benefits: Social Security, Supplemental Security Income (SSI), Medicare/Medicaid, and Children’s Health Insurance Program (CHIP) continue; expect slower phones/appointments. [1][2]
Travel: Flights, air traffic control (FAA), and airport screening (TSA) continue; build in extra time. [4]
Parks: Assume limited services; check park alerts before you go. [10]
Passports/Visas: Many services continue (fee-funded). Verify appointment status at travel.state.gov. [6]
TANF: Payments commonly continue via state administration and available funds; confirm with your state human services agency. [13][14]
Military/Defense: Operations continue; some civilians furloughed; pay subject to later congressional action. [8][9]
Shutdowns are disruptive, but they end when Congress passes new funding or a short-term extension. Until then, the rules above should help you navigate what’s open, what’s closed, and what’s simply slowed.
When it comes to the Federal budget, several terms are used and it is important to understand what they are in order to know how they are funded, and how they shape the overall Federal budget. So, if you are interested in understanding the Federal budget, understanding these terms is a must. Most federal spending fits into three categories. Understanding how and why these categories work can help you understand the Federal Budget process and what programs keep paying even during funding lapses, why others pause, and where most dollars are actually spent. They can also help you understand what constraints Congress is under, knowing each of these categories will help you understand how little discretion there is in the budget without legal changes. For a high level understanding of these three categories in FY2024: Mandatory Spending programs were a bit over $4.1 trillion (~60%), Discretionary Spending programs about $1.8 trillion (~26%), and Net Interest (i.e. interest paid on the National Debt) about $1.0 trillion (~14%), for roughly $6.8 trillion in total Federal outlays (spending). Net interest is shown as its own category in official presentations. [1][2][3]
What each Category Means
Mandatory Spending: This category of spending, as its name implies, is required by statute (law). Budget items in this category are automatically authorized for funding unless the law is changed. The statute (law) sets which programs are mandatory and the eligibility requirements and formulas for how much is authorized. Mandatory spending was about $4.1T in FY2024—roughly 60% of total outlays. [2][3]
Entitlements: This category is a subset of Mandatory Spending. Entitlements are Mandatory Spending programs that confer a legal right to benefits to citizens, for example: Social Security, Medicare, and Medicaid are Entitlements. Entitlements make up the bulk of Mandatory Spending; Social Security and Medicare alone account for more than half of mandatory outlays. [2]
Net Interest: The interest the U.S. pays on its National Debt. It’s authorized by permanent law (a permanent, indefinite appropriation) [4], which is why many sources describe it as “technically mandatory,” but it is shown as its own category in the budget, separate from both mandatory and discretionary. In FY2024 it was about $1.0 trillion (~14% of total outlays). [1][3]
Discretionary Spending: This is the remaining non-compulsory spending, everything Congress has not defined by statute (law). Short of changing the law on Mandatory Spending programs, this is the part of the budget Congress can adjust annually. Discretionary spending is just over one-quarter of total outlays (~26%). Congress decides discretionary levels each year during the Federal budget process in 12 separate appropriations bills produced by the Appropriations Committees. (See our Article on Federal Budget Process.) [1][5]
Figure 1: Federal Budget Categories FY 2024 Source: CBO
What’s inside each Category
Mandatory Spending
Programs
Description
Entitlement
FY 2024 Budget Amount
% of Total Federal Spending
Social Security (Old-Age, Survivors, and Disability)
Provides benefits to retired workers, the disabled, and their spouses, children, and survivors. Funded by payroll taxes.
Yes
$1.45T
21.4% [2]
Medicare
A federal health insurance program primarily for people age 65 or older and certain younger people with disabilities.
Yes
$0.9T
12.7% [2]
Medicaid and CHIP
A federal-state health care program for low-income and needy individuals, including children, pregnant women, the elderly, and people with disabilities.
Yes
$0.6T
9.1% [2]
Veterans’ disability compensation and pensions
Provides benefits to veterans who have a service-connected disability. Pensions are paid to low-income wartime veterans.
Yes
$0.2T
2.8%
Federal civilian and military retirement
Provides retirement benefits to federal government civilian employees and military personnel, including pensions, disability, and survivor benefits.
No
$0.2T
2.9%
Unemployment Insurance (federal share)
A joint federal-state program that provides temporary, partial wage replacement to unemployed workers.
Yes
$0.03T
0.5%
SNAP and other nutrition programs
Provides benefits to low-income households to supplement their food budgets. Other programs include school lunch, and food assistance for seniors.
The part of tax credits that can be paid as a refund.
Yes
$0.16T
2.4%
Affordable Care Act (a.k.a. Obamacare)
Provides tax credits and other subsidies to help eligible individuals and families afford health insurance.
Yes
$0.11T
1.6%
Farm programs (e.g., crop insurance subsidies)
Provides subsidies and other support to farmers and agricultural producers.
No
$0.03T
0.5%
Other Mandatory Programs
A collection of smaller, non-entitlement mandatory outlays not separately itemized, such as deposit insurance, payments for natural resources, and other government-wide programs.
No
$0.3T
4.1%
Subtotal Mandatory Spending
$4.1T
~60%
Net Interest
Program
Description
FY 2024 Budget Amount
% of Total Federal Spending
Net Interest
Debt Service – Interest payments on US National Debt
$1.0T
~14%
Discretionary Spending
Programs
Description
FY 2024 Budget Amount
% of Total Federal Spending
National Defense
Funds for the Department of Defense (military operations, personnel, weapons procurement, research), and other defense-related activities in other agencies.
$0.9T
~13% [1]
Health and Human Services
Discretionary funds for health research (e.g., NIH), public health, and human service programs, separate from Medicare and Medicaid entitlements.
$0.1T
~2%
Education
Provides funding for federal education initiatives, grants, and programs at all levels.
$0.1T
~1%
Transportation
Supports highway and airport construction, mass transit, and other infrastructure projects (note: highways/aviation have mandatory contract authority, but spend-out is shaped by annual limits).
$0.1T
~1%
Veterans’ Health Care
Funds health care services provided through the Veterans Health Administration (separate from mandatory disability compensation).
$0.1T
~2%
Homeland Security
Funds for agencies responsible for homeland security, including border patrol and immigration enforcement.
$0.06T
~1%
Housing & Urban Development
Public housing, community development, and housing assistance programs.
$0.06T
~1%
Energy & Environment
Department of Energy, Environmental Protection Agency, and other natural resource and environmental programs.
$0.06T
~1%
International Affairs
State Department, USAID, and foreign aid.
$0.06T
~1%
Other Discretionary
Various government agencies and programs, including general government administration, science, and space exploration (e.g., NASA/NSF).
$0.3T
~5%
Subtotal Discretionary
~$1.8T
~26%
Summary
Knowing Federal Budget terms is useful for understanding how and where Federal money is spent. In FY2024 the Federal Government spent ~$6.8 trillion and took in ~$4.9 trillion, with a deficit of ~$1.8 trillion. The majority of the spending goes to Mandatory programs, most of which are Entitlement programs providing services and benefits to citizens. Net interest—about $1.0T—is reported as its own category and paid under permanent law. As the Mandatory components grow, there is less room for Discretionary items that Congress can administer without reductions in mandatory spending, increases in tax revenue, or additional borrowing. When you look at discretionary spending, many people would consider those categories essential – Education, Environment, Transportation, National Defense – core services of government. Understanding these components clarifies the difficult trade-offs between fiscal sustainability and key government services. [1][2][3][4][5]
Citations
[1] Congressional Budget Office (CBO), The Federal Budget in Fiscal Year 2024: Infographic; and Discretionary Spending in FY2024: Infographic (discretionary ≈ $1.8T; composition; total outlays context). [2] CBO, Mandatory Spending in Fiscal Year 2024: An Infographic (mandatory ≈ $4.1T; Social Security + Medicare > half of mandatory). [3] CBO, Monthly Budget Review: Summary for Fiscal Year 2024 (total outlays ≈ $6.8T; net interest ≈ $0.95T, rounded to $1.0T). [4] 31 U.S.C. § 3123, Payment of obligations and interest on the public debt (interest paid under permanent, indefinite appropriation). [5] CBO primers on budget categories and the annual appropriations process (12 appropriations bills produced by the Appropriations Committees).
The National Debt is the total amount of money the U.S. Federal government owes to its creditors. It is the result of borrowing over time to cover the difference between government spending and tax revenue. When the Federal government spends more than it collects in taxes and other revenues, it must borrow to make up the shortfall—accumulating debt in the process. Those shortfalls get added to the National Debt.
Some National Debt, like household debt, is a normal occurrence for most countries. Our National Debt has accrued across many decades and administrations, with spikes in spending deficits increasing generally during periods of war, economic downturns, or national emergencies. As of 2025, the U.S. National Debt exceeds $37.2 trillion (37.2 x 1012). This figure may seem abstract or overwhelming, but it represents a fundamental aspect of how the U.S. government operates and finances its obligations.
Understanding what the National Debt is – and is not – is essential for anyone interested in how public finance is managed. This article explain the mechanics of how our government, including the institutions within our government, borrows, creates, and manages the U.S. National Debt.
U.S. Treasury’s Role
The U.S. Department of the Treasury plays a central role in managing the National Debt. While Congress controls the power of the purse, authorizing how much the government can spend, the Treasury is responsible for ensuring there is enough cash on hand to meet those obligations. When spending exceeds revenue, the Treasury borrows money to fill the gap. So while the Treasury does NOT set policy, they ensure that there is enough money to manage authorized government spending.
This borrowing is done by issuing debt instruments, such as Treasury bills, notes, and bonds, which are sold in public auctions. The Treasury’s Office of Debt Management oversees this process, aiming to finance government operations at the lowest possible cost over time while maintaining a stable and efficient market for U.S. debt.
Treasury debt management is a balancing act. On one side is the need to borrow funds efficiently to support government functions. On the other is the responsibility to maintain investor confidence, manage interest costs, and ensure that debt issuance does not disrupt broader financial markets. (See our Article on Return of the Bond Vigilantes)
Role of Other Government Institutions
Although the Treasury is part of the executive branch, it does not act alone. Its operations are closely tied to other branches and institutions:
Congress holds the authority to tax and approves spending. It also sets a legal cap on how much total debt the Treasury is allowed to issue, known as the Debt Ceiling. When the Debt Ceiling is reached, the Treasury cannot issue more debt until Congress raises the limit, even if spending has already been authorized.
The Federal Reserve, an independent arm of Government, the Fed interacts frequently with Treasury markets. The Fed is responsible for Monetary policy which they do in part by buying and selling Treasury securities, which affects interest rates and market liquidity. The Fed is also a major holder of Federal debt.
The Executive Branch sets Fiscal policy through the President’s annual budget policy proposal. The actual borrowing is implemented by the Treasury within the constraints set by law and market demand. (See our Article on U.S. Federal Budget Process)
The coordination of processes between these Institutions ensures that the government can meet its obligations and that financial markets remain stable and predictable.
Deficit vs. Debt: What’s the Difference?
A common source of confusion in discussions about federal finances is the distinction between a deficit and the debt. Though related, these two terms refer to different aspects of the government’s fiscal position.
Annual Deficit
A Federal Deficit refers to a shortfall that occurs in a single fiscal year—when the government spends more than it collects in revenues such as taxes and fees for a given Fiscal year. For example, if the government collects $4.5 trillion in revenue but spends $6 trillion in a given year, the resulting deficit is $1.5 trillion.
Deficits have become increasingly common and the U.S. is currently experience a stretch of over 20 years of annual Deficits in a row, many consider this a structural deficit (i.e. a ongoing gap between spending and revenue). This happens often during times of war, economic downturns or national emergencies when spending needs spike. The government covers the gap by borrowing—that is, by issuing new Treasury securities.
The National Debt
The National Debt is the total accumulation of all past deficits and interest minus any surpluses. If the government runs a deficit every year, the National Debt grows correspondingly. Surpluses—when revenue exceeds spending—can reduce the debt, but those have been rare in recent decades.
In this way, the National debt functions like revolving credit on a credit card: each year’s deficit is an additional charge, and the total balance owed plus interest on the debt is the National Debt.
Understanding this relationship helps clarify how policies enacted in one year (such as tax cuts/increases, economic growth, interest rates, or new spending) can have long-term implications for the size and trajectory of the National Debt.
Components of the National Debt
The National Debt is made up of two main components: debt held by the public and intragovernmental holdings.
Debt Held by the Public
This is the portion of the debt held by outside investors, including individuals, corporations, mutual funds, pension funds, state and local governments, foreign governments, and central banks. These entities (buyers) purchase Treasury securities as a safe and liquid investment. U.S. Treasuries are considered some of the safest investments in the world due to the size, economic power, and unlimited ability to tax possessed by the U.S. Government. This category of debt is the most economically significant because it represents funds the government must repay to outside parties, with interest.
Publicly held debt is auctioned on the open market and is influenced by investor demand, interest rates, and broad macro economic conditions but ultimately comes down to the trust and credit of the U.S. This is also the figure economists typically refer to when evaluating the sustainability of federal debt, particularly when comparing it to Gross Domestic Product (GDP) and it is usually expressed as a measure of National Debt / GDP as a ratio.
Intragovernmental Holdings
This portion of the debt is held by Federal government accounts. For example, when Social Security or Medicare collects more in taxes than it currently pays in benefits, the surplus is invested in special Treasury securities. These holdings represent a claim on future government resources and must be repaid when the funds are needed.
Although these debts are internal to the government, they still represent real obligations. The Federal government is legally required to honor these commitments when the time comes.
Gross vs. Net Debt
Gross Federal debt is the total of both Debt Held by the Public and Intragovernmental Holdings. It reflects the full scale of federal obligations or sometimes called Total Debt.
Debt held by the public, a subset of gross debt, that excludes Intragovernmental Holdings, and is commonly used to gauge economic impact, particularly when comparing across countries or over time.
Government Funding Operations
The Federal government raises money (borrowing) through the sale of Treasury securities, which function as IOUs. These securities are issued with different maturities and structures, allowing the Treasury to manage its borrowing needs flexibly.
It is common to hear phrases like “the government is printing money,” especially in debates about debt and inflation. However, that expression is misleading. The U.S. government does not directly print money to pay for its expenses. Instead, when it needs to spend more than it collects in revenue, it borrows by issuing Treasury securities. These securities are bought by investors who exchange their existing dollars—already in circulation or on deposit in banks—for government debt instruments.
In this system, money isn’t magically printed by the Treasury or the President flipping a switch. Here’s what actually happens:
Congress passes a law authorizing spending in excess of expected revenues.
The Treasury calculates how much it needs to raise (borrow) and schedules the issuance of new debt—typically through a series of regular auctions (i.e. sale of treasury securities).
Investors—banks, individuals, mutual funds, pension plans, foreign governments—buy Treasury securities, moving money from their accounts to the Treasury General Account at the Federal Reserve.
The Treasury uses that money to make payments, whether it’s funding Social Security checks, building infrastructure, or paying military salaries.
So where does the confusion about “printing money” come from? It often stems from the role of the Federal Reserve. The Fed can buy Treasury securities in the open market (or during extraordinary times, directly from dealers right after issuance). When the Fed does this, it credits banks with new reserves—electronic entries in their Fed accounts—effectively expanding the monetary base (i.e. creating money).However, this isn’t the same as printing physical currency, and it still represents a debt-backed transaction rather than a direct grant of money.
To review: government borrowing creates debt, not new money. Money enters the system when the Fed decides to inject liquidity by buying those securities or otherwise increasing bank reserves. This distinction is crucial to understanding how modern fiat economies function and why inflation is tied more to overall money supply and velocity than simply to the size of the national debt.
Types of Treasury Securities
When the Treasury is borrowing to raise money it may issue different securities with different interest rates and maturities to maintain a flexible financial position.
Treasury Bills (T-Bills) are short-term securities that mature in one year or less. They do not pay interest directly; instead, they are sold at a discount, and investors receive the full face value at maturity.
Treasury Notes (T-Notes) have maturities of 2 to 10 years and pay interest every six months.
Treasury Bonds (T-Bonds) are long-term instruments, typically maturing in 20 to 30 years, with semiannual interest payments.
Treasury Inflation-Protected Securities (TIPS) adjust their principal with inflation, preserving purchasing power for investors.
Savings Bonds, like Series EE or I Bonds, are sold directly to individuals and are not traded on secondary markets.
Each type of security is suited for different investor needs, and together they create a stable and liquid market for government debt.
How Securities Are Sold
The Treasury conducts regular auctions, where it offers new securities to the public. Institutional investors, banks, and even foreign governments participate in these auctions. The process is competitive, and interest rates are determined by market demand. If Demand is low, interest rates go up and if Demand is high interest rates go down.
After the initial auction, Treasury securities can be bought and sold on the secondary market, where prices fluctuate based on interest rates and investor sentiment. This liquidity makes U.S. government debt attractive around the world.
History of the National Debt
The United States has carried a National Debt since its founding. Alexander Hamilton, the first Secretary of the Treasury, famously argued for the benefits of maintaining some National Debt as a tool to build credit and promote economic stability. [1]
“A national debt, if it is not excessive, will be to us a national blessing; it will be powerful cement of our union…”
Alexander Hamilton
The National Debt has grown and shrank in response to various needs and policy priorities in our country over time. However, in general, these factors generally play a significant role in rapidly rising National Debt.
War: During wars, the government borrows heavily to finance military operations. This was true during the Civil War, World Wars I and II, and more recently in the conflicts in Iraq and Afghanistan.
Economic Crisis: In economic crises, such as the Great Depression, and the 2008 financial crisis the federal government has borrowed large sums to stimulate the economy and support households and businesses.
National Emergencies: In periods of National Emergencies, like that brought on by the COVID-19 pandemic, the federal government may step in and provide an economic boost to the economy to support households and businesses.
Structural Deficits: When the annual yearly budget has a deficit, and that deficit is consistent for a number of years it is often due to a structural imbalance. This means that the difference between revenues and expenditures is more than a one off and represents a consistent shortfall. This, for example, could be from rising healthcare and retirement costs, and tax policy decisions that reduce revenues without equivalent spending reductions. This can be slow, but consistently add to the National Debt.
The key measure economists use to assess debt sustainability is the debt-to-GDP ratio. This compares the size of the debt to the size of the economy. While the dollar amount of debt is high, its impact depends largely on whether the economy is growing fast enough to keep pace.
In the years following World War II, debt was over 100% of GDP but declined as the economy grew. In recent years, however, the debt-to-GDP ratio has once again exceeded 100%, driven by major events (COVID-19 Pandemic, 2008 Financial Crisis), and higher spending on entitlement programs and interest.
Figure 1 – US Total Public Debt Source: Federal Reserve
Interest Costs and the Federal Budget
Just like a credit card, or mortgage, the U.S. must pay Interest on its debt. As the National Debt becomes higher, so do the Interest payments. Interest payments on the National debt represent a major—and growing—component of the Federal budget. Last year the Interest on National Debt became the 3rd largest budget item on the Federal budget surpassing National Defense. These payments are the mandatory cost of borrowing, and they must be paid regardless of other spending priorities.
As the debt grows and interest rates rise, these payments consume an increasing share of federal resources. In fiscal year 2024, interest on the debt surpassed $1 trillion
This means that a significant portion of taxpayer dollars goes toward servicing our debt versus providing services or benefits to Americans. Over time, the interest costs from a large National Debt with high interest rates could squeeze out spending from other areas, including some deemed mandatory/critical.
Figure 2 – US Interest Costs Source: Federal Reserve
Who Owns the National Debt?
The U.S. National debt is widely distributed amongst many different investors and classes, both domestically and internationally. They generally fall into 3 categories based on Foreign, Domestic, or Federal Government ownership. Understanding who holds the U.S. National Debt may help you understand what control and influence a entity may or may not have.
Domestic Holders
Most U.S. debt is held by American investors, including mutual funds, pension funds, banks, insurance companies, and individuals. These entities view Treasury securities as a low-risk, stable investment, especially during uncertain times.
The Federal Reserve also holds a substantial amount of Treasury securities. These holdings are part of its monetary policy toolkit and help influence interest rates and economic activity. The Fed does not hold debt for profit, and any interest it earns is returned to the U.S. Treasury.
Foreign Holders
Foreign governments and investors, especially those with trade surpluses, purchase U.S. debt to hold as part of their foreign exchange reserves. Japan and China are among the largest foreign holders. While foreign ownership raises questions about influence, these countries invest in U.S. debt because of its reliability, liquidity, and the dollars use as the Global Reserve currency to settle payments between countries. A little less than a 1/3 of U.S. National Debt is held abroad.
Intragovernmental Holdings
As noted earlier, federal agencies like the Social Security Administration hold Treasury securities as a way to invest trust fund surpluses. These are essentially internal transactions, but they still represent obligations that must be honored in the future.
Figure 3 – US Foreign Held Debt Source: Federal Reserve
Conclusion
The National Debt is a ongoing function for the U.S. government to manage its finances and activities. It is neither inherently good nor bad—it is a tool. Debt enables the government to respond to emergencies, invest in infrastructure, stabilize the economy, and fund essential programs. Productive uses of spending and debt can add significantly to the Economic well being of the country. However, it also carries responsibilities to maintain long-term fiscal management and interest costs.
Informed citizens can better interpret political debates and media coverage related to debt, deficits, and budgeting. By grounding the conversation in facts and data, we can move toward a clearer, more productive understanding of how our government manages its finances.
The terms “surplus”, “deficit” and “debt”, or “National Debt”, are often used at the same time, and sometimes interchangeably, but they represent distinct concepts in government finance. Understanding the difference is crucial for grasping the fiscal health of our nation. This article discusses the differences, helps define them and put them in terms Citizens can use.
What is a Surplus & Deficit?
Imagine your household budget for a given period, say a month. You have money coming in (your income) and money going out (your expenses).
Deficit: If in that period you spend more money than you earn, you have a deficit. You’ve spent more than your current income . For a government, a budget deficit occurs when its total expenditures (spending on programs, services, etc.) exceed its total revenues (money collected from taxes, fees, and other sources) within a specific fiscal year (typically October 1 to September 30 in the U.S.) [3]. That is to say Total Expenses exceed Total Revenue.
Deficit
Inadequacy or insufficiency. “a deficit in revenue.”
The amount by which a sum of money falls short of the required or expected amount; a shortage. “budget deficit.”
Deficiency in amount or quality; a falling short; lack. “a deficit in taxes, revenue, etc.”
Surplus: Conversely, if you earn more money than you spend in a given month, you have a surplus. The government experiences a budget surplus when its revenues exceed its expenditures in a fiscal year. This means that your Total Revenue exceeds your Total Expenses and you have money left over [3].
Surplus
Being more than or in excess of what is needed or required: synonym: superfluous. “surplus revenue.”
Being or constituting a surplus; more than sufficient. “surplus revenues; surplus population; surplus words.”
An amount or quantity in excess of what is needed.
What is a National Debt?
Now, let’s extend that household analogy. If you consistently spend more than you earn each month, you’ll likely need to either a) Reduce Spending, b) Increase Revenue, c) Take from Savings, or d) Borrow money (use credit). Your use of credit might be a credit card, a loan from a bank, or borrowing from friends and family. This accumulated borrowing represents your total debt.
National Debt: The National Debt (or public debt) is the cumulative total of all the money the federal government has borrowed over its entire history to cover past deficits, minus any surpluses [1, 3]. When the government runs a deficit, it has to borrow money, usually by issuing Treasury bonds, bills, and notes. This new borrowing adds to the National Debt. When it runs a surplus, it can use that extra money to pay down a portion of the existing debt, or put into funding other programs and services.
While the US Government has mechanisms that you and I don’t have that make it different than a Credit Card, for our analogy the National Debt accumulates like the total balance on your credit card or loan statement, which reflects all the outstanding purchases (expenses) you’ve made over time and haven’t fully paid off (debt). Every time you have a monthly deficit (spend more than you earn and put it on credit), your overall credit card debt increases.
Debt
Something owed, such as money, goods, or services.”used the proceeds to pay off her debts; a debt of gratitude.”
An obligation or liability to pay or render something to someone else.”students burdened with debt.”
The condition of owing. “a young family always in debt.”
National Debt and Deficits in Context, why does it matter?
For the United States, carrying some debt is nothing new, with rare exception the U.S. has carried debt since its inception [2]. Carrying some debt is normal, and perhaps beneficial – say like a Mortgage and a Credit Card bill you pay each month. However, the scale and trajectory of the US National Debt have dramatically changed over the last few years. The US has had some economic shocks that increased the debt rapidly including the 2008 Great Recession, and the COVID Pandemic. What is different now with our current National Debt is that it is the highest it has ever been ($36.95 Trillion) [10] greater than our entire country’s annual economic output of $29.18 trillion in 2024 (Debt to GDP > 100%) [11]. Troubling is that this is a peace time debt surpassing World War II levels of spending. To some, more concerning is that each year we have a deficit in our budget, now exceeding over a trillion dollars annually, that appears to be a structural shortfall. Meaning, the government’s revenue is consistently below its expenses and commitments that isn’t one time or transient, and must borrow each year to meet its funding needs.
The last time the U.S. federal government ran an annual budget surplus was in 2001 [1, 3]. Since then, the nation has experienced a continuous string of deficits (over 20 years in a row). This persistent pattern isn’t just a result of temporary economic downturns; it’s driven by structural deficits.
Structural deficits refer to a persistent imbalance between government spending and revenues that exists even when the economy is operating at its full potential (i.e., not in a recession, or major economic shock) [1, 3]. These are not caused by the ups and downs of the business cycle but by fundamental, long-term mismatches in revenue and expenses [3]. Key drivers of structural deficits in the U.S. include:
Aging Population: As the population ages, programs like Social Security and Medicare face increasing demands, leading to higher spending. Fewer working-age individuals contribute taxes relative to the growing number of retirees receiving benefits [1].
Rising Healthcare Costs: Healthcare costs consistently outpace economic growth, putting upward pressure on government spending for programs like Medicare and Medicaid [1].
Tax Policies: Decisions to cut tax rates without corresponding spending reductions, or a tax base that doesn’t keep pace with the modern economy, can contribute to insufficient revenue.
Increased Spending Commitments: Long-term commitments to various government programs and services, without sustainable funding mechanisms, create an ongoing gap.
These underlying factors mean that even during periods of economic prosperity, the U.S. government is projected to continue spending more than it collects, contributing to the ever-growing national debt [1].
Are Deficits Bad? What about Interest?
Deficits, and Debt spending are not all bad. Government can step in to “prime the pump” in times of economic turbulence to smooth a business cycle, and some government investments add to overall productivity. However, while sometimes beneficial (e.g., during wars, pandemics, or severe economic crises to stimulate recovery), persistent and large deficits are generally not a good thing because they directly lead to a larger national debt, and a larger national debt brings its own set of challenges:
Increased Interest Payments: Just like you pay interest on your credit card debt, the government must pay interest on the National Debt [8]. As the debt grows, so does the amount of interest the government has to pay. If your credit card balance keeps growing, a larger and larger portion of your monthly payment goes just to interest, leaving less money to pay down the principal or for other essential spending.
Real-World Impact: For the U.S. federal budget, interest payments on the national debt have become one of the fastest-growing “programs” [8]. These payments are mandatory and siphon away funds that could otherwise be used for other programs like education, infrastructure, scientific research, defense, or reducing taxes [8]. In 2024 Interest expenses exceeded $1 trillion dollars, passing the US Military as the 3rd largest expense in the Federal budget [12].
Crowding Out Budget Items: As the Interest payments grow, if they get large enough it puts the government in a difficult situation. If they are unable offset the deficits with more Revenue they may be forced to reduce other programs, or add to the Debt compounding the challenge. This has the effect over time of crowding out other government expenses in order to pay the rising Interest expenses.
Higher Interest Rate Expenses: When the government borrows heavily to finance its deficits, it competes with private businesses for available capital in the financial markets [9]. This increased demand for capital can drive up interest rates from investors who are taking on more risk from a highly leveraged seller. Higher interest rates make it more expensive for the government to borrow money to finance the debt. This leads to increasing Interest expenses. For example if you’re constantly maxing out your credit cards, banks might be less willing to lend you money or increase your interest rate to compensate for their higher risk.
Reduced Fiscal Flexibility: A large and growing national debt limits the government’s ability to respond effectively to future crises (like recessions or natural disasters) or to make necessary investments [8]. With a significant portion of the budget already allocated to interest payments, policymakers have less room to maneuver. If your household expenses match your income, an unexpected medical emergency or job loss can be catastrophic if you have no financial buffer or ability to borrow more without extreme difficulty. This can lead to difficult choices, potentially requiring painful tax increases or spending cuts during times when economic stimulus or social support is most needed [8].
Risk of Fiscal Crisis: In extreme cases, if investors lose confidence in a government’s ability to manage its debt, they may demand much higher interest rates or stop lending altogether. This could lead to a fiscal crisis, where the government struggles to pay its bills, potentially causing economic instability, inflation, and a loss of trust in the nation’s financial system [8]. This situation is unlikely to happen in the US as the Reserve Currency in the World, and backed by the US Governments unlimited ability to tax.
US Advantages: The Reserve Currency and Fiat Money
It’s important to acknowledge that for countries like the United States, whose currency (the U.S. dollar) holds reserve currency status, there’s a unique advantage. As the world’s primary reserve currency, the dollar is widely used in international trade, finance, and as a store of value by central banks globally [5]. This creates a consistently high demand for U.S. Treasury bonds, even amidst large deficits, making it easier and often cheaper for the U.S. government to borrow money [5]. Foreign governments and investors are generally willing to lend to the U.S. at relatively low interest rates because U.S. Treasury securities are considered extremely safe and liquid [5]. However, this ability is not unlimited and we may get to a point where that is tested (See our article Return of the Bond Vigilantes).
Furthermore, because the U.S. government issues its debt in its own fiat currency (a currency not backed by a physical commodity like gold, but by government decree), it theoretically has the ability to “print” more money to pay its debts. This gives it a degree of flexibility that countries borrowing in foreign currencies do not possess [5].
However, most mainstream economists believe that while these factors allow for higher debt levels, they do not negate the long-term risks associated with persistent structural deficits and a continuously rising national debt. Even with the reserve currency advantage and the ability to issue debt in fiat currency, there are still significant potential downsides:
Inflation: While printing money can address debt, doing so excessively without a corresponding increase in goods and services (productivity) can lead to inflation, eroding the purchasing power of the currency [7].
Loss of Confidence: Even for a reserve currency, if debt levels become truly unsustainable or if the government appears unwilling to address its fiscal imbalances, investors could eventually lose confidence, leading to a depreciation of the currency and higher borrowing costs as demand moves away from the dollar.
Intergenerational Equity: Accumulating massive debt effectively transfers the burden of repayment (through future taxes or reduced services) to younger and future generations.
It’s worth noting that a minority school of thought, known as Modern Monetary Theory (MMT), holds a different perspective. MMT proponents argue that a sovereign government, which issues its own fiat currency, is not financially constrained in the same way a household or business is [6]. They contend that such a government can always create enough money to meet its obligations and finance spending, as long as it avoids inflation [6]. From this viewpoint, the primary limit on government spending is the availability of real resources in the economy, not the ability to finance deficits [6]. While MMT has gained some academic traction, its policy prescriptions and core tenets remain largely outside the economic mainstream and are considered outside of the mainstream by most economists, who emphasize the importance of fiscal sustainability and the risks of unchecked government spending and debt [7].
Conclusion
In conclusion, surpluses are annual measures of revenue outpacing expenses, deficits are an annual measure of overspending, and the national debt is the cumulative total of all borrowing less surpluses. Persistent deficits lead to growing debt, which in turn leads to higher interest payments, potential crowding out of private investment, reduced fiscal flexibility, and an increased risk of economic instability. While the U.S. dollar’s reserve currency status and the nature of fiat currency provide certain advantages in managing debt, most economists agree that these do not make the nation immune to the long-term structural problems that large and growing deficits entail [13][14]. Addressing these long-term fiscal challenges requires difficult policy choices to ensure a sustainable economic future.
Tax Project Institute is a fiscally sponsored project of MarinLink, a California non-profit corporation exempt from federal tax under section 501(c)(3) of the Internal Revenue Service #20-0879422.
