Do We Have Too Much State and Federal Debt?

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Richard F. Keevey
February 21, 2025

All governments borrow money at some time, albeit for different reasons. While government borrowing is critical—it can help manage the macroeconomy and facilitate economic development—it is not without attendant perils.

Federal Debt: What to Know

The federal government is currently issuing debt at an alarming rate. The total debt held by the public is currently $29 trillion (101 percent of GDP.); and is projected to reach $50 trillion by 2034. Debt was $14.1 trillion in 2016 (77 percent of GDP).

The federal government issues debt for just about anything, including for capital and operating purposes. No distinction is made between the two. While states and local governments have an operating budget and a capital budget, the federal does not have the latter. Federal bond sales support spending as varied as national defense (e.g., purchasing aircraft carriers), and government operations (e.g., the IRS.) Is borrowing for a wide range of activities considered  sound fiscal practice? Most public finance experts would answer no. Still, it has been the practice of the federal government since the beginning of our nation.

Note there are several classifications for federal debt. The first—”debt held by the public”—is the accumulation of annual budget deficits (last year’s deficit was $1.7 trillion) and adds to the $29 trillion noted above. The second category is money “transferred” from several trust funds—such as the Social Security Trust Fund—where such ‘borrowing’ is currently estimated to be about $6 trillion. These loans are repaid by future bond sales when dollars are needed to make solvent the various trust funds.

Thus, the “real” total federal debt is more than $35 trillion. Confusing? You bet—and we would need another 5,000 words to explain adequately the various nuances and implications.

Note that like state and local governments, the federal government also has “non-bonded obligations,” such as unfunded liabilities for Social Security, Medicare and pension and health care benefits.

State and local Debt: What To know

State and local governments also issue debt, but at much lower levels. State and local bonded debt is about $3.5 trillion. These governments issue debt for mostly capital investment-related purposes.

There are three types of debt issued by subnational jurisdictions: 1. general obligation (GO) debt; 2. appropriation debt—sometimes referred to as contract debt; and 3. debt supported by revenue generated by the project (revenue debt). Generally, GO debt is approved by the voters for general capital purposes.

Appropriation debt, perhaps the least familiar, is only approved by the legislature and governor, and these bonds are generally issued by a designated public authority established specifically for that purpose. This process exists in only few states and is often viewed as a way to circumvent obtaining voter approval.

The third type of bond is issued by a state authority established by the governor and legislature to finance specific infrastructure investments. The bonds are secured by revenues generated by that investment, such as a turnpike authority.

Only GO debt has the full faith and credit of the state or local unit.  And, like the federal government, in addition to bonded debt, most state and local governments have “non-bonded” obligations—the largest two being employee pension and retirement health benefits..

Some Observations

Most state and local debt is for critical infrastructure projects. Importantly, and unlike the federal government, state and local governments cannot “print money” to support debt. Moreover, state and local units of government face constitutional and/or statutory limitations on their ability to issue GO debt. And, the capital markets serve to limit the amount of debt, as investors will simply refuse to purchase the debt or do so only at exorbitant rates of return.

The issue is different for the federal government, due primarily to its size and market power. Just how much debt can the federal government issue and maintain going forward? Is it an unlimited amount? I think not, but I truly do not know. The answer is more complicated than a simple yes or no, or a specific dollar amount. As such, those who say “Just balance the federal budget and cut spending” are not realistic, and are not well informed. The nation’s needs are too expansive and growing. However, it may be possible to reach a realistic compromise as a hedge against future uncertainties.

It is clear to me the tax code must be reformed to raise more money, and to alter spending practices. For example, we should: reduce the (annual) $1.8 trillion of ‘tax expenditures’ (e.g., tax credits, tax base deductions, etc.)—principally those benefiting the richest elements of our society; increase the top tax rate on individuals and corporations; alter defense policy (the U.S. spends more on defense than the next 10 largest countries combined); and bend downward the growth curve for social safety net programs. None of these suggestions will be easily accomplished, but are necessary.

In sum, borrowing by governments is not all good or bad as a public policy strategy. Rather, a deliberate, thoughtful and realistic strategy should be employed—one that considers the trade-offs, including the long-run and short-term impacts on the jurisdiction’s finances, as well as the positive and negative implications on the nation’s overall well-being.

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Author: Rich held two presidential appointments as deputy undersecretary at DOD and CFO at HUD. He was appointed state budget director by two New Jersey governors. He was director of the Policy Institute at Princeton University. Currently, he is a senior policy fellow at Rutgers University. He served as the executive officer of a nuclear missile battery in Europe in the mid-1960s.

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