The Federal Government Debt: Its Size and Economic Significance
LIBRARY OF CONGRESS WASHINGTON DC CONGRESSIONAL RESEARCH SERVICE
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After several years of surpluses in the late 1990s, the federal budget has been in deficit since FY2001. Deficits represent the additional borrowing required in each year to bridge the gap between tax revenues and spending outlays. Each deficit adds to the already existing stock of outstanding federal debt. Some of those deficits may have seemed large at the time, but the budget deficits for FY2009 and FY2010 are expected to be much larger than those of recent years. The prospect of such rapid growth in the federal debt may seem alarming, and some might wonder how much the debt can grow before it poses significant economic risks. In a slack economy, federal borrowing and spending can stimulate growth in output in the short run. As the economy approaches full employment, federal government borrowing adds to total credit demand and tends to push up interest rates. Higher interest rates increase the cost of financing new investment in plant and equipment and thus may tend to reduce the stock of productive capital below what it might otherwise have been. That would tend to reduce the longrun rate of growth.
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