How Does Government Spending Today Affect Your Children’s Wallets Tomorrow?

When a government spends more than it collects in taxes, it borrows the difference, and that debt is repaid over decades by future taxpayers. The US national debt now exceeds $39 trillion, roughly the size of the entire economy. Heavy borrowing can crowd out private investment and raise interest costs, but it only burdens the next generation if the economy fails to grow alongside the debt.

Government expenditure is an essential determinant of the GDP of any country, and the scale of it can be staggering. In the United States, the accumulated national debt has now passed $39 trillion, which is roughly equal to everything the US economy produces in a year. We will come back to how a country’s debt can grow to rival or even exceed its annual GDP, but first, it’s crucial to understand all the avenues where the government spends money.

Expenditures incurred by any government can be classified under two categories: capital and revenue. Economic activities conducted related to agriculture, industry and services can be categorized between capital and revenue expenditures. All expenditures incurred that go towards creating assets in the economy are called capital expenditures.

Expenses for creating infrastructure and the repayment of loans come under the capital expenditure classification. Expenditure incurred towards general upkeep and maintenance of government bodies (pensions, salaries, building repairs, etc.), repayment of interest on borrowed loans, and allocation towards public welfare programs are some examples of revenue expenditure.

Therefore, expenditure that does not create any asset or goes towards maintaining government departments and providing services comes under this category. 

Governments, like any other organization, must find sources to fund these various expenditures. These sources can be either internal, through borrowing or taxation, or even external borrowings from other countries or international financial institutions (World Bank, IMF etc.). Except for taxation, whichever source the government chooses to borrow from will incur a cost: the cost of repaying the principal, along with the interest payment. This article will seek to explain the implications of tapping into that second source, borrowing.    

Why Do Governments Borrow?

Taxation is never sufficient for any government to fulfill its responsibilities and duties. Government expenditure always exceeds government revenues. Deficit spending has therefore become the norm for almost all countries. Take the instance of the US government; in the past 90 years, it has run 76 annual deficits and only 14 annual surpluses, and in fiscal year 2025 alone the gap between spending and revenue reached $1.8 trillion, equal to 5.9% of GDP. Borrowing also lets a government invest in things that pay off slowly, such as research and development, infrastructure and education, all of which raise the productive capacity of its citizens over the long run.

Thus, all governments end up borrowing. When the borrowing exceeds the revenues, it is called deficit spending. Just like any personal loan, borrowing comes with the cost of repaying the principal along with the interest. These loans are paid off over a period of time. Therefore, while the benefit is incurred today, as the borrowed amount is disbursed immediately, the cost might be borne by future generations.

Of course, if the borrowing is for infrastructure, then future generations equally benefit from this, but not in the case of any revenue expenditure, costs such as paying off salaries, etc. The benefits, in that case, may not affect all or most citizens directly, as in the case of infrastructure.

How Much Can Governments Borrow?

Too much debt can overwhelm a country’s finances, apart from creating the risk of inflation due to overspending by the government. Governments need to be wary of how much debt they decide to incur. On the plus side, unlike individuals, governments are perennial. This means that while individuals need to pay off all their debts in a lifetime, governments can run deficits for indefinite periods.

Therefore, the goal for governments is typically not to become debt-free, but to timely service repayments and actively avoid defaults. This is because payment defaults have severe implications, as they affect the country’s credibility and would attract negative sovereign ratings, thereby increasing interest costs for any future borrowing.

The cost of carrying that debt can grow quietly until it crowds out everything else. In the US, net interest on the debt topped $1 trillion in fiscal year 2025 for the first time, which is more than the country spends on national defense. Every dollar paid to bondholders is a dollar that cannot go to roads, research or tax cuts.

A country’s debt is considered sustainable if the government is able to meet all its current and future payment obligations without exceptional financial assistance or going into default, as defined by the International Monetary Fund (IMF).

Economists generally look at the country’s debt-to-GDP ratio to get an overview of the fiscal health of the government.

How Do Governments Ensure Their Debts Are Sustainable?

Generally, the debt-to-GDP ratio indicates the financial leverage of an economy. It is computed by dividing the total accumulated debt by the country’s annual GDP. The resultant ratio shows how large the debt is relative to a full year of economic output. US gross federal debt has climbed to roughly 120% of GDP, up from about 100% before the pandemic. While a low debt-to-GDP ratio is desirable, a high debt-to-GDP ratio is not necessarily bad for an economy. Even if a country has accumulated too much debt, it need not necessarily burden the future generation if the economic prospects are bright, as this would also translate into higher incomes for future citizens. The debts incurred today would therefore, on average, ensure that every citizen tomorrow is better off compared to today, and as a result, governments would be able to levy higher taxes to pay off existing debts.

The catch is that debt does not always work this way. When a government borrows heavily, it competes with private firms for the same pool of savings, which can push up interest rates and crowd out private investment. The Congressional Budget Office estimates that every additional dollar of federal deficit reduces private investment by roughly 33 cents. Less investment today means a smaller economy, and a heavier tax bill, for the children in the article’s title.

The sustainability of debt depends not only on a nation’s growth prospects, but also on key institutions, such as central banks, law and order, etc. Politically unstable countries are seen as a financial risk. While there is no rule of thumb denoting the ideal debt-to-GDP ratio, countries need to be wary internally of how much debt is too much, as this inevitably affects their future debt costs.