Skip to main content

Analysis | Possible Consequences of US Government Debt Default

By Brian Wanko  |  April 20, 2023

Debt and default.

These words can create worry, panic and instability in families, communities and nations. They should. Overspending on a credit card is unwise. Missing a mortgage payment has penalties.  If it happens often, it gets harder to stay above water.

This also rings true for governments, their debt levels and their ability to repay. However, the ramifications of debt and default are greater when they occur on a stage impacting billions of households in America and around the globe.

The U.S. federal debt has more than tripled in the past 15 years to over $31 trillion. Economists debate what constitutes sustainable government debt, such as ratios of debt to gross domestic product; net interest payments to GDP; and the point at which debt begins to adversely impact the economy. For example, the U.S. debt-to-GDP ratio is 120%—slightly lower than its pandemic peak but historically higher than the 30% to 70% experienced from the 1970s to the 2000s.

What if the U.S. defaults? It is hard to say what would happen, as there is no modern precedent.

Economists debate whether the debt-to-GDP ratio is a strong default predictor. Japan’s debt ratio has been higher than 120% for more than a decade and now stands at over 260%—the highest of all major economies. The government has yet to default, despite constant worries. Every country has unique economic, political, security and cultural challenges; these variables make economic forecasting and comparisons tough. If economists have differing understandings of U.S. debt, how can the average U.S. citizen interpret the potential problems—other than to be worried?

Consumers are concerned. More than half of respondents to a recent Gallup poll stated that they worry a great deal about federal spending and the budget deficit. Politics reflect that. Since the start of the new Congress, House Republicans have made reductions to federal spending and controlling national debt a cornerstone of their policy platform. House Speaker Kevin McCarthy (R-Calif.) and Budget Committee Chair Jodey Arrington (R-Texas) are insisting that an increase in the debt ceiling be tied to meaningful budget cuts.

The Biden administration has its own plan to control debt, with the president’s fiscal year 2024 budget proposing taxes on high-income earners and other reforms. The parties have engaged in debate but each points to the other as the one unwilling to negotiate a compromise.

What if a compromise fails? The threat of a default is one that politicians use as leverage. A U.S. federal default has never occurred, and the last U.S. state default happened during the Great Depression. Even threats themselves are rare, with fewer than a dozen crises occurring in the last 30 years. Yet, the threat of default—especially as the limit nears—might shock the overall economy, sending stocks tumbling, putting the brakes on hiring and sinking consumer spending, among other adverse effects.

What if the U.S. defaults? It is hard to say what would happen, as there is no modern precedent. The U.S. government could not create more debt by selling new bonds, thus halting the flow of federal funds. And, minting a trillion-dollar coin is purely theoretical. So, in a practical sense, Social Security and federal pension payments might cease; federal agencies would furlough employees; vital economic services such as the post office, Transportation Security Administration, U.S. Customs and the Federal Aviation Administration would stop without an emergency stopgap measure by Congress and the president.

In addition to general economic turmoil, predictions include a severe impact to state budgets: Federal reimbursements to states would cease, matching money for partnership programs would no longer be available, and the federal government would suspend funding for state-led projects and programs. State budgets would be severely affected. These catastrophic events would likely send the U.S. and global economies into a tailspin and perhaps even a major depression.

Read more: State and Local Government Associations Support NGA’s Call for Bipartisan Solution on Debt Limit

Brian Wanko is a legislative director in NCSL’s State-Federal Affairs Program.


  • Contact NCSL

  • For more information on this topic, use this form to reach NCSL staff.