There has been a lot of recent talk about the level of government debt. The City of Olympia had a 2024 debt of $85 million. Governor Ferguson inherited a Washington State debt estimated at $13 billion. And the One Big Beautiful Bill will balloon the federal debt (currently $37 trillion) by another $3 trillion, despite huge cuts to Medicaid, National Parks, Education, Foreign Aid, and even the National Weather Service.
But what does that actually mean? Is it too much debt? Or not enough debt?
Federal debt is very different from state and local debt.
The Cities and the State have both an “operating budget” and a “capital budget.” The operating budget – for most employees and current programs — are “balanced” meaning that taxes and other income in the current budget period (year or biennium) at least equals expenditures. The capital budget – for new buildings, acquiring and developing parks, and other investments – is often at least partly funded with bonded debt, paid off within the lifetime of the new facilities, just like you or I might get a mortgage loan on a house.
The City of Olympia debt is for very specific capital projects: City Hall, parkland acquisition, the 4th Avenue Bridge, roundabouts on Boulevard Road, and for water and sewer improvements. For example, in 2004, we voted a tax increase for new parks. The City then issued bonds – to be paid off with the new tax revenues — to pay for about 15 different parcels, some of which remain undeveloped. But all of these investments have assets that are worth more than the debt. For example, the City bought the land for the Yelm Highway Community park with tax revenues, but is funding the improvements with debt.
The city “operating budget” (police, firefighters, parks maintenance, potholes) is balanced every year (two year budgets for Tumwater, which means they are never voting on a budget in an election year — very clever!). For the 2025 Olympia budget, the Council used a bit of accounting acrobatics, applying a projected budget surplus from 2024 (called “fund balance”) to cover what would have been a deficit.
The State debt is also for specific capital projects. University buildings, bridges, prisons, state housing trust fund, park improvements, state office buildings, and computer systems. All of these have assets that are worth more than the debt. The operating budget (state workers, utility bills) is “balanced” every biennium; this year the legislature voted several tax increases to make that happen.
The Federal debt is very different. The Federal Government does not have a separate “capital budget.” It issues bonds and treasury notes and bills for any expenditure. While the federal government does have capital expenditures for long-term assets (buildings, vehicles, tanks, aircraft carriers, and nuclear submarines) they do not track capital investments separately from operating expenditures. The Congress budgets annually with shortfalls of up to $1 trillion dollars (that’s about $3,000 per person for each of us.) The amount of federal debt is quite staggering, and is going up quickly. I’m OK with deficit spending in an urgency, but I’m fearful of the burden we have placed on future generations.
The graph below shows the growth of the federal debt since 1980, when it first exceeded $1 trillion. Since that time there is only one President to achieve a balanced budget – Bill Clinton. Carter, Reagan, Bush 1, Clinton, Bush 2, Obama, Trump, and Biden all ran deficits. These were necessary to keep the economy from a depression during the crash of 2008 and during Covid, but arguably simply the result of having taxes too low and/or spending too high in other years. The Medicare and Social Security shortfall is a different and equally frightening problem; perhaps I’ll write about those in a future issue of WIP.
It helps to look at the local, state, and federal debt on a per-person basis, to provide some comparability. The data below is 2024 and 2025 data – the most current I could find easily for each. The debt per person is 10-times greater for the federal debt than for the State debt, and 70-times greater for the federal debt than the City debt.
Will this debt ever be paid off? Well, yes, the individual bond issues will be paid off when they mature. Federal debt is issued with various maturities, from a few months to 30 years, and some old debt is paid off every week (currently, by issuing new debt). State and City debt is mostly issued for 10 – 30 years, depending on the project. But each entity will likely be perpetually in debt. That is, new capital projects (for the City and State) will come up, and will be debt-financed, to spread the cost over the period of time when the assets will provide a public benefit.
And the Federal debt – it may be at a point where the market will force higher taxes and lower spending pretty soon. We are already at the point where we pay about as much for interest on the existing debt as we do for Social Security, Medicare, Medicaid, or the military (and everything else put together is another slice about the same size.) This graph shows the federal budget for the current year. If interest rates rise, that problem gets worse. If there is a current-year deficit (there is – about $1 trillion/year) that compounds the debt spiral.
Another way to look at this is the debt load as a percentage of income. Here we divide the debt load by the Gross Domestic Product for the USA, by the Gross Income for the State of Washington, and by the Gross Income for the City. There is no published City data, so I simply assumed our income per capita is the same as for the state (in reality, Thurston County is a little richer than average, but I think Olympia is pretty close to average).
Looked at another way, the people of Olympia could pay off the entire City debt with one-week’s income; it will take generations to pay down the federal debt.
Because US government debt has been viewed as “risk-free” by financial markets, it is an investment held by foreign individuals and governments. The governments, businesses, and investors in Japan, the UK, and China together hold about $3 trillion in US government debt, and altogether, foreign countries hold about $9 trillion. If foreign investors suddenly lose confidence in US government debt, it could create a very serious crisis, given that we issue trillions of dollars of new debt (much of it refinancing old debt) every year.
There is no similar concern for State or Local Government debt; there is not that much of it, it’s virtually all held by domestic investors, and most of it is longer-term debt financing major capital projects. We might have trouble borrowing for future projects, but we don’t have a bow wave of short-term notes coming due every week like the Federal government does.
Jim Lazar is an economist, retired from a career in energy economics and utility regulation.