If resulting policy decisions, along with prevailing economic conditions, lead to levels of government spending which exceed revenue collection, the government will incur a budget deficit. Data on the levels of federal debt are often reported in three categories: debt held by the public, debt held by federal government accounts (intragovernmental), and gross (total) federal debt. Debt held by the public is the total amount the federal government has borrowed from the public and remains outstanding. Gross federal debt is composed of debt held by the public and intragovernmental debt. Factors influencing movements in debt include spending levels, revenue collections, and economic growth. In most years, debt held by the public has increased on a nominal basis. Nominal measures of debt, however, do not control for inflation. As long as the economy grows faster than the debt, the debt will become less burdensome relative to the economy as a whole. Observing historical trends in federal debt levels can illustrate how budget policy and the economy affect the debt outlook and illustrate the reasons why large changes in debt levels occurred. In order to make an appropriate comparison over time, outlays, receipts, and debt will be measured as a percentage of gross domestic product (GDP). After the war ended, federal debt fell in nearly every year, as a percentage of GDP, for the next three decades as a result of strong economic growth during most of the period. After years of declining debt, the trend reversed in the 1980s and debt as a percentage of GDP began rising. In the absence of changes in spending and receipts, GDP growth allows an economy to absorb higher levels of debt and will generally result in a decrease in the ratios of both the gross debt and debt held by the public, as a percentage of GDP. During the FY1940 to FY2009 (the period analyzed in this report), GDP growth alone did not necessarily result in the expected movements in debt as a percentage of GDP, showing that other factors influenced changes in debt levels. In some instances, increases in spending or decreases in tax revenue outweighed strong GDP growth, causing debt as a percentage of GDP to increase rather than decrease. At other times, a combination of tax revenue increases, spending reductions, and strong economic performance led to declines in debt as a percentage of GDP. If large primary deficits (deficits in excess of the net interest payment) are expected to persist, or if the interest rate on the debt is expected to exceed economic growth indefinitely, then it may become more and more difficult for the federal government to sell new securities. In other words, it may become harder for the federal government to find investors willing to finance its deficits. This was followed by a long period of steady economic growth, which generally exceeded budget deficits and resulted in declining levels of federal debt as a percentage of GDP. During the 1990s, spending cuts, revenue increases, and strong GDP growth, combined with a strong economy and budget process reforms, all contributed to the reductions in the debt held by the public as a percentage of GDP seen at the end of the decade. Increases in gross debt as a percentage of GDP as a result of intragovernmental debt are a significant concern over the long run. Long-Term Effects of Federal Borrowing

Over the long-term, high levels of debt can have a significant impact on future federal spending and revenue decisions and the economy. In June 2010, CBO projected that a permanent and immediate combination of spending cuts and revenue increases amounting to 6.9% of GDP will be necessary in order to maintain the present level of debt (as a percentage of GDP) 50 years from now. If prompt actions are not taken, the magnitude of changes required in the future would be greater.
Financing the obligations of the United States has always been a central concern of Congress and the President. If policy decisions and economic conditions lead to levels of government spending which exceed revenue collection, the government will incur debt. Levels of federal debt are reported in terms of debt held by federal government accounts (intragovernmental), and gross (total) federal debt. Debt held by the public is the total amount the federal government has borrowed from the public and remains outstanding. Intragovernmental debt is the amount owed by the federal government to other federal agencies. Gross federal debt is composed of debt held by the public and intragovernmental debt.
Movements in federal debt occur over time. Historical trends can be useful in synthesizing how policy and the economy affect the debt outlook. In most years, debt held by the public has increased on a nominal basis. Nominal measures of debt, however, do not control for inflation. As long as the economy grows faster than the debt, the debt will become less burdensome relative to the economy as a whole. Measuring debt as a percentage of gross domestic product (GDP) controls for effects such as inflation and economic growth, allowing for comparisons over time.
Factors influencing movements in debt levels include spending levels, revenue collections, and economic growth. These factors can lead to changes in debt as a percentage of GDP which cannot always be anticipated. For example, if increases in spending or decreases in tax revenue outweigh strong GDP growth, debt as a percentage of GDP can increase. At other times, increases in tax revenues and declines in spending, in combination with strong economic performance, can lead to declines in debt as a percentage of GDP.
World War II resulted in unprecedented levels of debt as a percentage of GDP as a result of rapidly increasing outlays, which outpaced GDP growth. After the war ended, debt as a percentage of GDP fell in nearly every year over the next three decades as a result of strong economic growth. After that period of strong GDP growth, rapid increases in defense spending and tax cuts during the 1980s resulted in a decade-long trend of rising debt as a percentage of GDP. The early 1990s were characterized by tax increases, a recession, and rising debt as a percentage of GDP. This was followed by several years of budget surpluses and a strong economy, which led to declines in debt as a percentage of GDP in the late 1990s. Currently, tax cuts, increases in spending, and a weak economy have resulted in rising debt levels as a percentage of GDP.
High levels of debt can have a significant impact on the federal budget and the economy over the long term. Though debt levels today do not match historical highs, future levels of debt concern many. CBO projected that a permanent and immediate combination of spending cuts and revenue increases amounting to 6.9% of GDP will be necessary in order to maintain the present level of debt (as a percentage of GDP) 50 years from now. If immediate actions are not taken, the magnitude of changes required in the future would be greater. If large primary deficits (deficits in excess of the net interest payment) persist or if the interest rate on the debt exceeds economic growth indefinitely, it may become harder for the federal government to find investors willing to purchase new debt. This might lead to an inherently unstable situation with regard to the government's ability to incur future debt. This report will be updated as events warrant.