5 Ways Governments Reduce National Debt (2024)

While reducing debt and stimulating the economy are common goals of most governments in developed economies, achieving those objectives often involves tactics that appear to be mutually exclusive and sometimes contradictory. Given the myriad of fiscal and monetary policies, individuals and economists commonly debate strategies to reduce the national debt.

Key Takeaways

  • Tax hikes alone are rarely enough to stimulate the economy and pay down debt.
  • Governments often issue debt in the form of bonds to raise money.
  • Spending cuts and tax hikes combined have helped lower the deficit.
  • Bailouts and debt defaults have disadvantages but can help a government solve a debt problem.

Ways That Governments Reduce Federal Debt

1. Bonds

Using Debt to Pay Debt

Governments issue bonds to borrow money to avoid raising taxes. This helps pay expenditures and stimulate the economy through public spending. The government must pay interest to its creditors with debt issues.

Theoretically, spending can generate additional tax income from businesses and taxpayers, which can be used to pay down debt. Issuing debt may provide a boost to economic growth but may not be effective in reducing long-term government debt directly.

$33 Trillion

The U.S. national debt in September 2023.

Buying Back Bonds

When the economy struggles, as during periods of high unemployment, governments seek to stimulate the economy by buying bonds they have issued. The U.S. Federal Reserve implemented quantitative easing, buying government bonds and other financial securities to spur economic growth and aid recovery from the financial crisis of 2007-2008.Many financial experts favor a quantitative-easing tactic in the short term. However, buying debt has not proved more effective than borrowing one's way to prosperity by issuing bonds.

2. Interest Rates

Maintaining interest rates at low levels can help stimulate the economy, generate tax revenue, and, ultimately, reduce the national debt. Lower interest rates make it easier for individuals and businesses to borrow money for goods and services, which creates jobs and increases tax revenues. Low interest rates have been used as a strategy of the United States, the European Union (EU), the United Kingdom, and other nations during times of economic stress.

3. Spending Cuts

From 1921 to 1974, the President led the government budgeting process. In 1974, President Nixon signed the Budget and Impoundment Control Act of 1974 so that Congress could reclaim power over spending. Each year, the Congressional Budget Office (CBO) publishes the long-term projections of the federal budget and the future economy based on a current snapshot.

Citizens often waver in opinions about the need to balance the budget or cut government spending. These cuts often culminate in reductions in benefits to low-income families, veterans programs, and environmental protection programs.

4. Raising Taxes

Governments can raise taxes to pay for expenditures and to pay down their debt. Taxes can include federal, state, and in some cases, local income and business tax. Other tax examples include the alternative minimum tax, "sin" taxes on alcohol and tobacco products, corporate tax, estate tax, Federal Insurance Contributions Act (FICA), and property taxes.

Although tax hikes are common practice, most nations face sizable and growing debts. When cash flows increase but spending continues to rise, increased revenues have little impact on a nation's overall debt level.

5. Bailout or Default

Many nations in Africa have been the beneficiaries of debt forgiveness. In the late 1980s, Ghana's debt burden was significantly reduced by debt forgiveness. To avoid default in 2010, Greece was given the equivalent of $146 billion in bailout funds by the International Monetary Fund and the European Union.

Default can include bankruptcy and/or restructuring payments to creditors, which is a common and often successful strategy for debt reduction.

Why Has the U.S. National Debt Grown?

While the U.S. national debt can increase and wane, economic strains such as the COVID-19 pandemic, the wars in Iraq and Afghanistan, and the Great Recession of 2008 have been contributors.

Who Owns the U.S. National Debt?

Public debt creditors include individual investors, institutions, and various foreign governments.

How Much Would Taxpayers Need To Provide To Pay Off U.S. Debt?

As of Sept. 21, 2023, the amount attributable to each U.S. taxpayer is $98,460.

The Bottom Line

Governments use various strategies to reduce their national debts. From issuing debt in the form of bonds to lowering interest rates, such actions may have short-lived success but always encounter debate.

5 Ways Governments Reduce National Debt (2024)

FAQs

5 Ways Governments Reduce National Debt? ›

The PWBM's three policy bundles to stabilize debt and grow the economy are along three themes: (1) raising taxes on high-income households, (2) broad-based changes to Social Security and Medicare, and (3) a mixture of broad-based new tax revenue and discretionary spending cuts.

How governments reduce the national debt? ›

The PWBM's three policy bundles to stabilize debt and grow the economy are along three themes: (1) raising taxes on high-income households, (2) broad-based changes to Social Security and Medicare, and (3) a mixture of broad-based new tax revenue and discretionary spending cuts.

What are the 3 major factors causing the national debt to grow? ›

Note. Tax cuts, stimulus programs, increased government spending, and decreased tax revenue caused by widespread unemployment account for sharp rises in the national debt.

How to solve debt problems? ›

6 ways to get out of debt
  1. Pay more than the minimum payment. Go through your budget and decide how much extra you can put toward your debt. ...
  2. Try the debt snowball. ...
  3. Refinance debt. ...
  4. Commit windfalls to debt. ...
  5. Settle for less than you owe. ...
  6. Re-examine your budget. ...
  7. Debt-to-income ratio. ...
  8. Interest rates.
Dec 6, 2023

Which of the following is a benefit of government debt? ›

Debt allows flexibility in offsetting an economic shock. The ability to pay for investments that lead to economic growth. Debt prevents the import - export ratio from exceeding transfer payments. Borrowing tends to increase wages and keep inflation rates stable.

How to reduce debt? ›

7 steps to more effectively manage and reduce your debt
  1. Take account of your accounts. ...
  2. Check your credit report. ...
  3. Look for opportunities to consolidate. ...
  4. Be honest about your spending. ...
  5. Determine how much you have to pay. ...
  6. Figure out how much extra you can budget. ...
  7. Determine your debt-reduction strategy.

Why should we reduce the national debt? ›

A nation saddled with debt will have less to invest in its own future. Rising debt means fewer economic opportunities for Americans. Rising debt reduces business investment and slows economic growth.

What are three ways to avoid debt? ›

How to avoid debt
  • Pay bills on time.
  • Start an emergency fund.
  • Pay with cash.
  • Strategies for paying down debt.

Why is US national debt so high? ›

Much of the rise in the national debt is attributable to an aging population, said Rouse, with 18% of the population over 65 today, up from 12% in 1983. As the baby boom generation has entered retirement, the amount the government spends on services like Social Security and Medicaid has risen.

Why is America in so much debt? ›

One of the main culprits is consistently overspending. When the federal government spends more than its budget, it creates a deficit. In the fiscal year of 2023, it spent about $381 billion more than it collected in revenues. To pay that deficit, the government borrows money.

How to pay $30,000 debt in one year? ›

The 6-step method that helped this 34-year-old pay off $30,000 of credit card debt in 1 year
  1. Step 1: Survey the land. ...
  2. Step 2: Limit and leverage. ...
  3. Step 3: Automate your minimum payments. ...
  4. Step 4: Yes, you must pay extra and often. ...
  5. Step 5: Evaluate the plan often. ...
  6. Step 6: Ramp-up when you 're ready.

What are 4 signs of debt problems? ›

The main debt indicators to watch out for:
  • I can't put a figure on how much I owe.
  • I rely on credit to cover my living costs.
  • the amount I owe is rising.
  • I've been contacted by a debt collection agency.
  • I'm making minimum payments.
  • there are arguments in my house about money.
  • I sometimes hide purchases from my partner.

Is national debt relief good? ›

National Debt Relief is one of the best companies when it comes to debt settlement—but debt settlement is risky, and it's costly even when it's successful.

What happens if national debt gets too high? ›

Decreased savings and income

The government's need to borrow will eventually exceed the savings available, and even though more households and businesses are purchasing treasury securities, national savings will reach a low point in comparison to the size of the federal debt.

Who owes the US money? ›

In total, other territories hold about $7.4 trillion in U.S. debt. Japan owns the most at $1.1 trillion, followed by China, with $859 billion, and the United Kingdom at $668 billion. In isolation, this $7.4 trillion amount is a lot, said Scott Morris, a senior fellow at the Center for Global Development.

What is the largest economy in the world? ›

The United States is the undisputed heavyweight when it comes to the economies of the world. America's gross domestic product in 2022 was more than 40% greater than that of China, the world No. 2. Even more striking, U.S. GDP was over five times that of the next two largest economies, Japan and Germany.

Can America ever pay off its debt? ›

Under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation).

How can the government reduce its debt-to-GDP ratio? ›

Essentially, the debt-to-GDP ratio can be reduced in three ways: Fiscal austerity (i.e., spending cuts, tax increases or both) Negative real return on bonds (i.e., a nominal interest rate that is less than the inflation rate) Economic growth (i.e., GDP growing faster than debt)

Who does the government owe the national debt to? ›

There are two kinds of national debt: intragovernmental and public. Intragovernmental is debt held by the Federal Reserve and Social Security and other government agencies. Public debt is held by the public: individual investors, institutions, foreign governments.

What would happen if the US debt was paid off? ›

Answer and Explanation: If the U.S. was to pay off their debt ultimately, there is not much that would happen. Paying off the debt implies that the government will now focus on using the revenue collected primarily from taxes to fund its activities.

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