The U.S. Federal Budget and Debt

Where the U.S. government's money goes, why federal debt has grown to around the size of the economy, and the concerns about rising interest costs.

The U.S. federal government spends several trillion dollars a year. Understanding where the money goes, and how it is financed, helps explain debates over debt.

Where the money goes

The largest items in the federal budget are:

Social Security, the main public pension.
Medicare, health insurance for people aged 65 and over.
Medicaid, health coverage for low-income people, shared with states.
Defence.
Interest on the national debt.

Social Security, Medicare and Medicaid are mandatory spending, set by existing laws rather than approved each year.

Deficits and debt

The U.S. government has run budget deficits in almost every year since 1970, with a short run of surpluses from 1998 to 2001. Large deficits during the 2008 crisis and especially the COVID-19 pandemic pushed federal debt held by the public to around 100 percent of GDP, a level last seen after the Second World War.

Rising interest costs

When interest rates were very low in the 2010s, large debts were cheap to carry. As rates rose sharply in 2022 and 2023, interest costs soared. In 2024, net interest payments on federal debt exceeded spending on defence. The Congressional Budget Office projects debt will keep rising as a share of GDP, driven by ageing, health costs and interest.

The debt ceiling

The U.S. has a debt ceiling, a legal limit on how much the government can borrow, which Congress must raise or suspend periodically. Standoffs over the ceiling have caused market anxiety, and in 2011 and 2023 contributed to downgrades of the U.S. credit rating by S&P and Fitch. Moody’s downgraded the U.S. in 2025, meaning none of the three main agencies still gave it a top AAA rating.

Why interest costs snowball

If the government owes 30 trillion dollars and the average interest rate rises from 2 percent to 4 percent, annual interest costs rise from 600 billion to 1.2 trillion dollars. That extra spending must be financed by more borrowing, higher taxes or cuts elsewhere. Rising rates can quickly change the budget outlook.

The debate

Some economists warn that rising debt could raise interest rates, crowd out investment and limit the government’s ability to respond to future crises. Others argue the U.S., borrowing in its own currency with deep global demand for its bonds, can sustain higher debt than other countries. Most agree the long-term trend needs attention.

Thinking the debt can be fixed by cutting foreign aid

Foreign aid is a tiny share of the federal budget. Meaningfully changing the debt outlook involves the large items: Social Security, Medicare, Medicaid, defence, and taxes.

Key takeaways

The largest federal spending items are Social Security, Medicare, Medicaid, defence and interest.
Federal debt held by the public reached around 100 percent of GDP after the pandemic.
In 2024, net interest costs exceeded defence spending.
Debt ceiling standoffs contributed to credit rating downgrades, with Moody's downgrading the U.S. in 2025.