What are the potential negative effects of higher U.S. budget deficit and national debt on the economy?
Higher federal budget deficits (and the debt that goes with them) can negatively affect the US economy in at least two major ways.
First, the higher deficits and debts force the government to borrow more money. When the government does this, there can be a crowding out effect. What this means is that people lend money to the government and the supply of money that can be lent to private firms goes down. Interest rates go up and there is less investment in private firms. This can reduce the country’s potential for economic growth.
Second, the growing deficits and debt can choke off the government’s ability to spend money on important projects. As the debt grows higher, more and more of the government’s spending must go simply to pay interest on that debt. This drains the government’s coffers and makes it harder for the country to do things that would help create future economic growth like building new infrastructure or helping more people go to college.
In these ways, higher deficits and debts can harm the US economy.