The Retirement of the National Debt: Will It Increase the Economic Size of the Federal Government?

Publication Date: August 2000

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

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Abstract:

Measuring the economic size of the federal government can be an elusive goal. Over the past 40 years, for example, the total outlays of the federal government have ranged between 17% and 23.5% of Gross Domestic Product (GDP). Yet, an alternative measure based on the government's consumption of goods and services, suggests a much smaller economic size: for over the past 40 years, this measure has ranged between 6% and 13% of GDP. The disparity between these two measures is accounted for by outlays that transfer income from some Americans to other Americans.

One major transfer is interest on the national debt. The current and prospective budget surpluses suggest that the publicly held debt could be effectively retired with the coming decade. This will reduce (and eventually eliminate) future interest outlays. The government is then free to used this saved revenue for further debt reduction, other transfer payments, increased spending on goods and services, or tax cuts. If the spending option is chosen, it will increase the governmentÕs consumption of goods and services, and the share of GDP accounted for by government even though the outlays as a percentage of GDP will remain constant. A transfer payment will have been converted into an outlay that will increase the percentage of GDP consumed by the federal government. Depending on which measure of size is used, the economic size of the federal government could increase. This report will updated as events warrant.