Deficit Spending: Overview.

Introduction

Deficit spending occurs when the expenditures of a government, business organization, or individual exceed revenues. In terms of government, it takes place when the money received from taxes, interest on loans, and other payments is less than the expenses it issues for public programs such as education, health care, and national defense. The US federal government is not restricted by law from engaging in deficit spending.

The concept of deficit spending has caused strong debate in political, academic, and economic circles. It is particularly relevant during times of economic crisis, such as the 2007–9 global recession or the fallout of the COVID-19 pandemic closures that began in 2020. However, as the federal deficit has also existed in times of economic boom, deficit spending routinely arises as an issue during the regular budget cycle. Debate over spending legislation, such as budgets (as well as comprehensive bills on health care, welfare, or economic development), typically includes discussions on the deficit and whether such bills will and should increase it.

Understanding the Discussion

Appropriation: A segment of a bill that offers money for a particular program or activity.

Deficit: Condition in which government spending exceeds money received from the public and other sources.

Inflation: An increase in the level of consumer prices or decline in the purchasing power of money caused by an increase in available currency and credit.

Recession: Period of economic decline lasting for two or more consecutive quarters.

Revenue: Money generated from taxes, interest, payments, and fees from the public and other sources to the government.

Surplus: Condition in which government revenues exceed spending.

History

Deficits and fiscal imbalances have long existed throughout human history. Many historians believe that the Roman Empire fell in part due to the government’s inability to evenly distribute currency throughout the empire. This collapse began in the first century CE, when the empire had grown to its greatest expanse. These experts point to the excessive spending practices of the central government in Rome and the leadership’s difficulty in receiving a return (such as revenue from taxes).

In the late eighteenth century, the French monarchy watched as its chief adversary, England, attempted to defeat a colonial revolt in America. Seeing a national interest in undermining the British crown, France funneled a significant sum of its money to the Americans (but received no financial returns for those investments). When the war came to an end, French leadership again attempted to strengthen its position relative to England by investing heavily in border protection and a revitalized navy. Meanwhile, domestically, the French government did little to rein in spending. The series of deficits this spending created lasted several years, worsening the French economy because of a lack of balanced fiscal policy. Desperate to offset this imbalance, the monarchy clamped down on an increasingly dissatisfied populace, which led to the eventual overthrow of the monarchy as a result of the French Revolution.

The early years of the United States also saw periods in which the government operated in a deficit. However, the occurrence of deficits was relatively infrequent—between 1800 and 1823, the US government ran a budget deficit only seven times. During the other years, the government ran budget surpluses. Some contend that the periods of deficit actually fostered economic growth that, in turn, returned increased revenues to the government.

In 1929, the US stock market collapsed, signaling the beginning of the Great Depression. For three years, the economy continued to free fall, not just in the US, but abroad as well. Banks were in ruin and unemployment skyrocketed. In 1933, in an effort to reverse the decline, President Franklin D. Roosevelt implemented a series of economic reforms known as the New Deal. The reforms created social services and allowed for increases in wages (despite market forces). The New Deal was a comprehensive spending package, creating aid for farmers, businesses, and people experiencing poverty in addition to reforming the financial system. With a public wary of new taxes, Roosevelt’s only recourse to account for these programs was to spend billions in borrowed money. The New Deal was not without controversy, as it is believed that many of the policies it contained actually prolonged the depression unnecessarily. However, it did accomplish many of its goals in the short term (such as lowering unemployment and increasing wages, as well as providing much needed relief to people experiencing poverty), and eventually restarted the economy on many levels before World War II.

In the 1980s, deficit spending again became part of US policy, although it appeared in a somewhat different form. Whereas New Deal spending focused on borrowing for the purposes of funding public programs, the policies of President Ronald Reagan emphasized deep tax cuts for businesses and the wealthy, anticipating that doing so would foster economic growth and lower unemployment. “Reaganomics,” as the policies were known, came with a price, for the decline in tax revenues caused the federal deficit to balloon. Reagan’s military buildup to counter the Soviet Union furthered the deficit’s growth, at a rate of $206 billion per year between 1983 and 1992.

In 2001, another global recession began, exacerbated by the terrorist attacks on the World Trade Center and the Pentagon on September 11. The administration of President George W. Bush responded with policies similar to “Reaganomics,” creating widespread tax cuts and rebates to help citizens and businesses cope with the ongoing fiscal crisis. The policies again cost the government a great deal of lost tax revenues, but by 2004, the economy had begun to turn around in spite of a high federal deficit (which was again inflated by military spending, given counterterrorism campaigns in Iraq and Afghanistan).

In 2008, the worst recession since the Great Depression took off, crippling markets, causing widespread layoffs, and in some cases destroying financial institutions. President Barack Obama, in his first year, introduced a massive economic stimulus package designed to bolster financial institutions. In late 2009, he also advocated the passage of a comprehensive health-care reform bill, making health insurance available for a large percentage of the previously uninsured population. Again, these bills did not involve tax cuts or reductions in other spending priorities and added billions to the deficit.

In the early twenty-first century, deficit spending remained a tool of policymakers to pay for much-needed government programs in times during which revenues were low. It is born of a school of thought first stressed by economist John Maynard Keynes, who, during the Great Depression, called for government to intervene in times of economic and fiscal crisis. Deficit spending is typically advocated by leaders who believe that a particular policy or program must be funded regardless of the economic environment, for if funding does not occur, the country will be in a worse situation. By issuing additional currency or taking out loans against future revenues, the nation is assuming the responsibility of one day paying back that debt when conditions allow. In the US, both Republican and Democratic Party leaders have used deficit spending to accomplish their agendas.

Two opposing political ideologies surround deficit spending. On one hand, supporters of Keynesian economics believe that the government must continue to intervene when the economy turns sour. These parties, such as famed Keynesian economist Paul Samuelson, have asserted that government spending during budget deficits opens markets, stimulates growth, and stabilizes the quality of life for residents so that the economy can return to strength. Furthermore, Keynesian economists cite the examples of Roosevelt’s New Deal and “Reaganomics” as policies that turned around underperforming economies. Despite the debt such policies incurred, proponents have argued, the benefits (e.g., the end of the Great Depression, renewed business growth, and security against Cold War adversaries) speak for themselves.

On the other hand, opponents of deficit spending have pointed to the long-term impacts of budget deficits. They have argued that deficit spending, by infusing into the economy additional currency and/or credit, fosters inflation, which in turn can hinder growth. Additionally, opponents have pointed to the crippling effects a budget deficit can have on the long-term health of a nation’s economy. Leaders who stand against deficit spending have expressed faith in the nation’s market to right itself during times of poor economic conditions, stressing the need to pay down budget deficits to reestablish the country’s credit and lending power.

In 2012, the US budget deficit topped $1 trillion for the fourth straight year in a row, though a decline in government spending and a 6.4 percent jump in tax revenue narrowed the spending/revenue gap by $207 billion from 2011 numbers. The economic recession, and the resultant spending that comes with maintaining economic stability in times of crisis, coupled with a decrease in tax revenues due to tax cuts enacted under President George W. Bush, led to persistently high deficits during the late 2000s. However, over the course of 2013 and 2014, the deficit began to narrow as revenues began to rise. By August 2014, the federal deficit was at $128.7 billion—13 percent lower than it was in August 2013. By October 2014, the deficit for the entirety of fiscal year (FY) 2014 was $483.35 billion, marking a 29 percent fall over the course of the year, and the lowest deficit since 2008.

In 2017, President Donald Trump and the Republican-held Congress pushed through a large tax cut that ballooned budget deficits still further. The Congressional Budget Office (CBO) predicted that the budget deficit for FY 2018 would be $804 billion, up 21 percent from the year before. The Republican prediction was that economic growth stimulated by the tax cut would increase government revenue over the long term and offset the deficit.

Deficit Spending Today

Deficit spending continued to be a contentious topic in the United States into the 2020s. In response to the COVID-19 pandemic of 2020, the US government curtailed business, educational, and social gatherings to reduce disease transmission, leading to an economic downturn and the highest levels of unemployment since the Great Depression. Between mid-March and mid-May 2020, Congress approved a record-setting $3 trillion toward pandemic-related measures, such as emergency loans, additional unemployment payments, and subsidies for job retention, and deferred the collection of income taxes. The Federal Reserve also announced interest rates would remain low. By that June, the CBO reported the deficit for the first eight months for FY 2020 was $1.2 trillion higher than over the same period in FY 2019. As the pandemic continued amid gradual rollouts of newly developed COVID-19 vaccines, in early 2021 the administration of President Joe Biden oversaw the passage of the American Rescue Plan, which dedicated an additional $1.9 trillion in government funds toward further economic recovery efforts. Over subsequent years, economists and commentators had conflicting views on the impact of such unprecedented periods of deficit spending, with some arguing that the influx of money quickly turned around the economy and others noting that it also contributed to sustained inflation and higher interest rates beginning around late 2021.

Pandemic-time deficit spending was initially embraced across the political and economic spectrum, but soon debate over potential longer-term economic implications resurfaced. In addition to conventional policy prescriptions of cutting programs versus raising tax revenues, some advocated for unusual maneuvers, such as obtaining debt cancellation from creditors like China or simply relying on the nation's past trustworthiness to continue borrowing indefinitely. Though such emergency spending had ended by 2023, the status of the budget deficit remained a prominent topic of discussion, particularly as the deficit continued to fluctuate dramatically.

Research on the short- and long-term impacts of deficit spending continued, with both sides of the issue citing the perceived benefits or shortcomings of this policy. In cases of severe budget deficits, partisan posturing and rhetoric often make objective analyses of deficit spending difficult.

These essays and any opinions, information or representations contained therein are the creation of the particular author and do not necessarily reflect the opinion of EBSCO Information Services.

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