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💵principles of macroeconomics review

Debt Held by the Public

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

Debt held by the public refers to the total amount of outstanding debt owed by the federal government to individuals, businesses, and other entities outside of the government. This excludes debt held by government agencies, such as the Social Security Trust Fund, and represents the portion of the national debt that is publicly traded.

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5 Must Know Facts For Your Next Test

  1. Debt held by the public is a key measure of the government's fiscal position and is closely watched by policymakers, investors, and the public.
  2. The level of debt held by the public can impact interest rates, as the government must offer competitive returns to attract buyers for its securities.
  3. Increases in debt held by the public can lead to higher interest payments, which can crowd out other government spending and investment.
  4. The size of the debt held by the public relative to the size of the economy, as measured by Gross Domestic Product (GDP), is an important indicator of the government's fiscal sustainability.
  5. Reducing the debt held by the public is often a key goal of fiscal policy, as it can help improve the government's long-term financial position and reduce the burden on future generations.

Review Questions

  • Explain the relationship between the federal budget deficit and the growth in debt held by the public.
    • When the federal government runs a budget deficit, meaning its spending exceeds its revenue, it must borrow money to finance the difference. This additional borrowing increases the overall debt held by the public. Conversely, when the government runs a budget surplus, it can use the excess revenue to pay down the debt held by the public. Therefore, the size of the federal budget deficit is a key driver of changes in the debt held by the public over time.
  • Describe how the level of debt held by the public can impact the government's fiscal policy and economic performance.
    • The level of debt held by the public can significantly influence the government's fiscal policy decisions. A high level of debt can limit the government's ability to use expansionary fiscal policies, such as increased spending or tax cuts, as it may need to divert resources towards servicing the existing debt. Additionally, a large debt burden can lead to higher interest rates, which can crowd out private investment and slow economic growth. Policymakers must carefully balance the need to manage the debt with the desire to promote economic stability and growth through fiscal policy measures.
  • Analyze the potential long-term implications of a sustained increase in the debt held by the public for the government's fiscal sustainability and the broader economy.
    • A sustained increase in the debt held by the public can have significant long-term implications for the government's fiscal sustainability and the broader economy. As the debt-to-GDP ratio rises, the government may face higher borrowing costs and increased interest payments, which can crowd out other government spending and investment. This can lead to a vicious cycle, where the growing debt burden limits the government's ability to stimulate the economy, further exacerbating the fiscal challenges. Additionally, a high level of debt held by the public can reduce the government's flexibility to respond to economic shocks or crises, potentially leading to financial instability and slower economic growth. Addressing the long-term sustainability of the debt held by the public is a critical component of responsible fiscal policy.