National Debt 2025
It is June of 2025, and there is a bill in Congress called the One Big Beautiful Bill Act, which was adopted by the House of Representatives in May and is targeted for Senate approval by July 4. The Congressional Budget Office has estimated it would add as much as $2.8 trillion to the debt over 10 years.
I have written in the past about the looming debt crisis
We have no longer have deficits of $1 trillion, instead averaging over $2 trillion annually, with a record deficit exceeding $4 trillion during the COVID-19 pandemic. The debt is well beyond $23 trillion from just six years ago, having soared to $36 trillion in 2025.
Before we talk about solutions, lets see what we can learn from history.
A Brief History Lesson
A New Nation Pays Off Her Debts
The United States as a fledgling nation had $75 million in war debt from the American Revolution (1776-1783) and a Gross Domestic Product (GDP) estimated at $190 million, for a ratio of debt to GDP just under 40% in 1790. Once the US Constitution replaced the weak and ineffective Articles of Confederation in 1789, the first Secretary of the Treasury, Alexander Hamilton, proceeded to consolidate and refinance the debt while relying on tariffs as a source of revenue. The initial debt was reduced to just under 6% of GDP by 1811.
With the onset of the War of 1812 (1812-1814), the debt began to climb again, continuing to grow after the war during a seven year economic depression that extended the years of deficit spending to 1821, when the national debt reached nearly 13% of GDP. In the years that followed, the debt dropped to near zero in 1834-1835, thanks in large part to Andrew Jackson's policies of fiscal responsibility, reducing government spending while increasing revenues. The debt to GDP ratio stayed comfortably below 2% for more than a quarter century, until the first serious crisis for the young nation since the American Revolution.
A Young Nation at War
When the nation plunged into Civil War in 1861, nobody expected the rebellion to last for four long years or to cost so much blood and treasure. By the end of the war in 1865, the national debt had climbed to almost 27% of GDP in 1865, and it continued to grow for the next four years, with high spending during the post war Reconstruction. The debt to GDP ration finally peaked at just over 32% in 1869.
As was the case after previous wars, the deficit spending ended when the war was over and the economy had recovered. The debt was reduced again slowly over time, as the debt to GDP ratio fell to under 12% from 1888 to 1917, dipping to under 8% for much of the period from 1905 to 1916. While the debt had not reached pre-war levels of under 2%, staying under 10% was considered manageable.
Tariffs and sale of government land were primary revenue sources before the Civil War. Tariffs were raised when revenue was needed, effectively acting as a sales tax more than a way to influence foreign trade. Income tax was instituted during the Civil War and then struck down by the US Supreme Court as unconstitutional, leading to the 16th Amendment, ratified in 1913.
Global Wars and Depression
After entering World War I in April of 1917, the debt quickly climbed to 34% of GDP by 1919 where it hovered before slowly declining again to bottom out at just over 16% when the Stock Market crashed in 1929, launching the US into the Great Depression.
When FDR assumed the presidency in 1933, the national debt had already climbed to over 32% of GDP, mostly due to three straight years of economic contraction, the GDP plummeting from $104.6 billion in 1929 to $57.2 billion in 1922 while the debt rose from $16.9 billion to $22.5 billion due to decreased revenues despite tax hikes in 1932.
FDR quickly pushed through his New Deal policies in 1933, with the debt rising to almost 43% over the next six years, despite further tax hikes in 1936. This was the first time in the nation's history that the national debt rose to levels higher than in 1790 when the nation had $75 million in war debt and a GDP estimated at $190 million, for a ratio of just under 40%.
The outbreak of war in Europe in 1939 provided economic stimulus as defense spending picked up, further increasing the debt, which climbed to a staggering high of over 118% of total GDP by 1946, despite tremendous grown in the GDP from $93.4 billion to $227.5 billion, which the debt rose from $40.4 billion to $269.4 billion.
Peacetime Prosperity
Thankfully, an economic boom swept the country after the soldiers came home and much of the industrial complex converted to civilian purposes. For almost 30 years straight, the national debt declined annually until dropping below 30% in 1974. Tremendous economic growth helped the economy outgrow the debt, despite cold war defense spending, wars in Korea and Vietnam, and the Apollo moon program. The debt hovered around 30% of GDP from 1974 until 1982, when tax cuts fueled economic growth while military spending skyrocketed in an attempt to put an end to the Cold War with the Soviet Union.
The national debt rose to as high as over 63% of GDP by 1996, when economic growth combined with nationwide concern over the growing debt, the signature issue for billionaire Ross Perot in his unsuccessful presidential bid in 1996. Bipartisan policy changes reduced the debt to just over 54% by 2000, which led to George W. Bush pressing for tax relief, which was passed in 2001, the same year as the 9/11 terrorist attacks in New York, Washington, and Pennsylvania.
Ever-Growing Debt
The "War on Terror" that resulted from 9/11, led to protracted wars in Afghanistan (2001-2021) and Iraq (2003-2011), resulting in enormous military spending, coupled with both tax cuts and massive spending increases from 2009-2019 in attempts to stave off recessions and keep the economy moving.
The outbreak of the COVID-19 pandemic plunged the country into a recession, with the GDP dropping in one year from $570.7 trillion to $494.9 trillion in one year, and the debt peaked at a new all time high of 122% of US GDP, even higher than the US as the end of World War II. During this period interest rates were kept very low by the Fed to help stave off inflationary pressure, or the debt would have grown much faster.
Renewed economic growth coming out of the pandemic, coupled with the end of hostilities in Afghanistan, led to a quick rebound in the GDP, so the debt, while still increasing fell back to just under 115% of GDP, and it continues to climb, reaching nearly 120% of GDP in 2024 while still growing.
Interest payments on the national debt were over $1 trillion for the first time in 2024, due to rising interest rates. The debt will grow in 2025 at a reduced rate, due in part to spending cuts as well as increased revenue, but even with rates dropping again, the interest payments are still expected to exceed $952 billion in 2025.
What Are the Options?
Reduce the Debt
It's pretty simple. The debt grows when the government spends more than it brings in. Deficit spending adds to the debt, and interest payments on the debt decrease the amount of revenues available for other spending priorities. To reduce the debt requires reducing spending to fit within revenues and/or increasing revenues to fund required spending.
Reduce Spending
Reducing spending sounds easier than it is. There are many areas of government spending that are considered untouchable, such as paying interest on the debt or paying social security benefits to retirees who paid into the system their entire careers. There are other areas that are extremely popular, such as Medicare to provide healthcare to older Americans, Medicaid to provide healthcare to disabled and low income Americans, national defense, and basic infrastructure.
Improved Efficiency
The spending made by the Department of Government Efficiency so far in 2025 have yielded only modest results relative to the overall problem (see https://doge.gov/savings). There is certainly plenty of room for criticism of how DOGE has been implemented, but the concept is still good. Improving efficiency is necessary and will ultimately be part of any sustainable solution, although it will not alone solve the problem.
Reduced Services or Eliminated Programs
There are not many areas of the budget that can be cut significantly without tremendous economic upheaval in the country. The programs and services have grown for nearly a century to include many that people take for granted.
As mentioned already, the interest payments in 2025 are expected to exceed $952 billion, or 13% of the total spending. By compariso⁹n Social Security spending will be approximately $1.6 trillion in 2025 (21% of the total budget), while Medicare is expected to be just over $1 trillion (14%), Medicad $890 billion (13%), and national defense $850 billion (13%).
Social Security
Social Security, for example, is a forced savings plan that is supposed to be self-funding but is actually more of a classic pyramid scheme, with the older recipients of benefits being paid by the younger worker paying taxes, since the Social Security "Trust Fund" was factored into the overall government budget, meaning the debt is actually higher if you consider total Social Security liabilities.
Medicare/Medicaid
Medicare and Medicaid are depended upon my millions or older, disabled, and low income Americans. Any cuts would need to be limited to older Americans through means testing or radical change to the healthcare system, which itself has no easy solution.
National Defense
National defense is an area that could be reduced, but how much could it be reduced without leading to significant issues with maintaining capability and influence as well as the cost of shutting down bases around the country and across the world? There is also the concern about needing to maintain a military strong enough to serve as an effective deterrent against potential future adversaries such as Russia, China, Iran, or North Korea.
Defense spending currently is a smaller share of overall GDP than at any time since World War II, other than a short period in the 90s after the Cold War until 9/11 attacks triggered wars in the Middle East. Even at the peak of the conflicts in Afghanistan and Iraq, the military spending was less than during any wartime period in the 20th century, including the increased spending on military build up an R&D for advanced middle defense systems in the mid 1980s that accelerated the end of the Cold War with the Soviet Union.
The spending on national defense is one of the few expenditures spelled out in the U.S. Constitution as the responsibility of the federal government.
2025 Year to Date
So far in 2025, with some of the spending freezes put in place while DOGE is ostensibly looking for ways to root out government waste, the interest payments have actually exceeded the projected annual percentage of total spending, at 14% of the total.
Increase Revenue
In addition to reductions in spending, there will need to be increased in revenue to eliminate the budget deficit and begin paying down the national debt.
Income Tax
Income tax was first used for revenue in 1861 to help fund the Civil War, and continued until 1872. Rates were 3-5% initially. In 1894 income taxes were re-introduced but overturned by the U.S. Supreme Court in 1895 as unconstitutional in the way the law had been written, since it did not allow for apportionment as required in Article 1, Section 8.
The 16th Amendment, ratified in 1913, allowed for income tax independent of apportionment, and Congress followed with a new income tax of rates varying from 1-6%. By 1918 during World War I, the top marginal rate rose to 77% on any income over $1,000,000, although the average rate was only 15% for most of the highest earners. The marginal rate fell as low as 24% in 1929 before rising again to 94% by 1944, due to the Great Depression and World War II.
The top marginal rates remained over 91% until 1963 before falling again to 70% from 1965 to 1981, when Ronald Reagan's signature tax relief plan was signed into law, reducing the top rate to 50% then further to 38.5% in 1987 before falling to 28% in 1988.
Income tax rates climbed again in stages until 1993, to 39.6%, which lasted until 2001, when rates were lowered again, in stages, in a populist move after modest budget surpluses from 1998-2000. Unfortunately, with the onset of war in the middle east following the 9/11/2001 terrorist attacks, spending rapidly increased, without sufficient revenue, and the debt began to grow again.
Income taxes alone have not been able to keep up with spending, and higher tax rates have not always led to proportional increases in revenue, as higher taxes tend to result in reduced overall spending.
Tariffs
Tariffs were originally used as a primary source of income for the US Government. By taxing imports, tariffs are effectively a national sales tax. Prior to the introduction of income taxes, this ensured that luxury items imported by the wealthy could be taxed without impacting the cost of necessities which were grown or made locally. Once an income tax was instituted, initially to pay for the Civil War costs and then made permanent to support the higher levels of spending as social programs and higher investment in national defense became popular.
The idea of using tariffs as leverage to negotiate trade agreements is a much newer idea. The claims by the Trump administration that this will cost other countries through loss of revenue and pull business back to the U.S. is misleading and ignores the reality of the modern global economy. It results in higher prices for American consumers, as tariffs have always done, and it disrupts supply chains for business that employ American workers while leveraging lower cost imported components, which has been one of several drivers of the large economic growth over the past generation.
Sale or Lease of Government Land
In addition to tariffs, selling government land was one of the few ways for the government to generate revenue prior to introduction of the income tax. With most government owned land now being set aside as national parks, wilderness areas, or national wildlife refuges, with the remainder being military bases, government buildings, and some public domain land. Revenue from sale of any land no longer needed would be relatively limited, as long as we continue to prioritize protection of natural areas of significant beauty and/or environmental importance.
Leasing government lands can be an area of revenue, including access to oil and gas reserves, as long as the extraction of the resources can be done without significant damage to those lands. Revenue is currently limited to under $10 billion and not likely to increase enough to significantly impact the budget deficit.
Increase GDP
Grow the Economy
A major contributor to the reduction of public debt relative to GDP over the years has been economic growth that causes the GDP to rise to levels where the old debt represents a smaller share of the overall economy. In the first period of debt reduction, despite low levels of overall revenue, moderate spending coupled with economic growth wiped out essentially all the debt. With each new cycle, growth of the GDP has played an increased role, not by eliminating the debt but by making the debt a smaller piece of the overall pie.
There are many factors influencing growth of GDP, one of which is the impact of high income taxes as well as corporate taxes. The tax cuts in 1981 were intended to help grow the economy through what is often called "trickle down economics." When the marginal tax rate was reduced in 1986, it was accompanied by a simplification of the tax system, closing loopholes, which was intended to be revenue neutral, so the tax cuts were not as significant as the change in nominal rates would imply. In other words, it wasn't really a tax cut and can't be used as a test case.
With that said, the simplification of the tax code and generally business-friendly climate did allow for economic growth, and despite the higher defense spending of the late 80s, which continued into the 1990s when the budget became balanced through bipartisan efforts at controlling spending while implementing moderate tax increases to close the gap.
Inflation
As the value of the dollar effectively drops due to inflation, the relative value of the debt goes down, but the costs go up, so the cost of operating increases, which is why the deficit needs to be eliminated, so we spend within our means. The government can print money, but without revenue to back it up, the end result is inflation.
Overcome debt through inflation while still adding to the debt through deficit spending is the worst solution, in part because the size of the debt is so large that only hyperinflation would wipe out enough debt before the new inflationary debt would eliminate any gains. Hyperinflation like Germany encountered after World War I or like Venezuela is facing currently is disastrous for a country's populace, as life savings are wiped out virtually overnight, and people can not afford to buy even a loaf of bread.
Unfortunately, when all else fails, hyperinflation is the natural outcome if runaway debt, when a country has no choice but to print money to pay its bills. This quickly leads to economic isolation, recessions that lead into depressions, failed businesses, and loss of confidence in the government, often resulting in social unrest and political upheaval as a result of tremendous hardship on the citizens.
Summary
We can not sustain the current record levels of national debt indefinitely, and we certainly can not continue to add to that debt at the rate we have for nearly a generation.
The process always takes time and sacrifice.
In the early years of the republic, with limited income and high debt from the Revolutionary War, it took an entire generation and a seven year depression to get the debt to near zero, in 1831. That debt started at just under 40% of the total national GDP.
After the Civil War and its aftermath, the restored nation had debt at just over 30% of the total national GDP, and it took until 1907 to reach a low of just over 7% of GDP, a total of 37 years from the peak in 1869 and 9 years of depression in the 1880s.
After World War II, the country's overall debt exceeded 118% of the total GDP by 1946. After 29 years of booming economic growth, the debt had dropped as low as just under 30% of GDP in 1974, barely below the post-Civil War peak. From that point, the debt began to rise again.
We are now have debt exceeding 120% of GDP and are devoting 14% of current spending to interest alone. If we look as the past efforts to reduce the overall national debt, it has taken 30-40 years to have a significant impact. The solution has been primarily growth of the economy, including inflation, while controlling spending to levels that fit within the annual revenue.
The answer is a multi-pronged approach, starting with reducing spending wherever we can while increasing revenue through taxes. The important thing is finding a balance where the tax policies promote economic growth while still providing revenue.
Resources
- The Federal Budget in Fiscal Year 2024: An Infographic (Congressional Budget Office)
- Historical Debt Outstanding (FiscalData.Treasury.gov)
- US National Debt Data (Compilation of data used in analysis to produce this article)
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