Last month, the federal government’s total debt hit $40 trillion. How did this happen?
The simple answer is that, every year since 2001, the federal government has spent more money than it has collected in revenue. As Figure 1 shows, using Congressional Budget Office data, the federal budget went into deficit in 2002 before recovering somewhat by 2007, without ever actually balancing again. In 2008 and 2009, the federal deficit exploded as the financial crisis hit, hitting $1.4 trillion in the latter year. Once again, it recovered somewhat until 2015, without ever actually balancing. Then began an inexorable increase until Covid-19 hit in 2020 and the deficit exploded to $3.1 trillion. By 2022, this had fallen to $1.4 trillion, but it has widened again since then. In 2025, the federal government borrowed $1.8 trillion, and that is how much the federal debt increased by that year. All these deficits add up, and that is how you end up $40 trillion in the hole.
Figure 1: Federal budget balance, trillions
Even worse is that, as Figure 2 shows, the debt has grown at a faster rate than Gross Domestic Product (GDP) in 18 of the 24 years from 2002 to 2025. As a result, the debt has grown from 32.7% of GDP in 2002 to 99.4% in 2025.
Figure 2: Growth of federal debt and GDP
So, we know that the federal government’s debt has grown because it keeps borrowing money and that it is adding to this debt pile, more often than not, at a rate greater than GDP growth with the result that the debt is growing share of our national income.
This begs the question; what has driven this consistently high level of borrowing? Given that borrowing is simply the excess of revenues over outlays, is it the case that revenues have shrunk, outlays have risen, or is it some combination of the two?
As Figure 3 shows, revenues have not changed much as a share of GDP since the last budget surplus in 2001: that year they accounted for 18.9% of GDP and that had fallen by 1.7 percentage points to 17.2% in 2025. Spending, however, increased from 17.7% of GDP in 2001 to 23.1% in 2025, a rise of 5.4 percentage points. In other words, as Figure 4 shows, of the 7.1 percentage point change in the federal budget balance, from a surplus of 1.2% of GDP in 2001 to a deficit of 5.8% in 2025, 26% was down to a decline in revenues and 74% to an increase in spending.
Figure 3: Federal revenues and outlays as a share of GDP
Figure 4: Responsibility for increased federal deficit, 2001 to 2025
A longer-term look tells a similar story. Over the 40 years from 1962 to 2001, federal revenues averaged 17.7% of GDP and this fell to 16.6% in the 24 years from 2002 to 2025, a decline of 1.1 percentage points. Federal spending, on the other hand, averaged 19.8% of GDP over the 40 years from 1962 to 2001, and this rose to 21.9% in the 24 years from 2002 to 2025, a rise of 2.1 percentage points. The increase in the average deficit between the two periods is 3.1 percentage points of which 35% is down to a decline in revenues and 65% to an increase in spending.
Figure 5: Responsibility for increased federal deficit, 1962-2001 to 2002-2025
So, the deterioration of the federal government’s budget with the consequent explosion of debt is down to a mix of lower revenues and increased spending with the latter accounting for about two thirds of it.