How are countries with constant or growing deficits not bankrupt?

Question

For example, the US and Canada have yearly deficits in the billions. Technically, doesn’t this mean the country is isolvent?

How often are countries in the surplus? What would they do with the extra funds/savings?

In: Economics

Answer 1

When a person is bankrupt, it is because they are unable to pay their outstanding debt obligations. The USA (and other countries in a similar position) won’t “go bankrupt” unless and until we default on our debts. A country going bankrupt is called a “sovereign default.”

The simple answer to the question is that as long as people are willing to lend the government money, it won’t run out of money, even by running deficits.

That obviously raises a follow-on point: why do investors still lend the government money if it doesn’t balance its budget? Won’t it run out *eventually* when the bills pile up too high?

There are a couple important reasons why that isn’t an immediate problem. First, if our economic growth is high enough, then even if we aren’t balancing the budget each year the increasing debt load won’t get high enough to force the country into default. This is because the amount of money the government takes in through taxes can go up when the economy grows. If we grow the economy fast enough to keep up with the growing debt load, we can keep making payments.

Second, many countries — and the US definitely falls into this bucket — are large enough, stable enough, and reliable enough that investors are happy to loan them money *in our own currency*. In extremis, a government that ran into severe fiscal trouble could just print extra money to pay its debts with. This would have huge economic consequences, like hyperinflation, but a desperate country might decide it would be worth it.

Obviously neither of these points means running large deficits is automatically a *good* idea. If the budget was balanced, the money could be directed toward anything that Congress or another country’s government wanted it to go to. It could fund more government programs, or it could go towards paying down the existing debt. Or, there could be tax cuts to bring revenue down to actual spending level.