Federal Budget Deficit
The federal budget deficit occurs when a government's annual expenditures surpass its revenues. For instance, if the government earns $500 billion but spends $700 billion in a year, the deficit would be $200 billion. This concept is often misunderstood; it is different from the national debt, which is the total accumulation of all deficits over time. In the United States, the federal budget has typically shown a deficit since 1970, except during a few years when surpluses were recorded. While significant deficits can raise concerns about fiscal responsibility, they are sometimes viewed as necessary for stimulating economic growth, especially during recessions or emergencies.
Many factors influence the federal budget deficit, including government spending on entitlement programs and economic conditions. For example, the deficit peaked at 9.8% of GDP in 2009 due to the Great Recession, while in 2017, it was 3.4% of GDP. Policymakers can address deficits through tax increases or spending cuts, though both options are often politically sensitive. A rising deficit in relation to GDP can indicate potential long-term economic challenges, particularly if government borrowing becomes unsustainable. Understanding these dynamics can provide insights into national economic health and fiscal policy discussions.
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Federal Budget Deficit
The federal budget deficit refers to the amount by which government spending exceeds revenues in a given year. For example, if the government takes in $500 billion in revenues in one year, but spends $700 billion, the federal budget deficit for that year is $200 billion. The federal budget deficit is often confused with the national debt, which is the total debt carried by the federal government, including the cumulative total of all budget deficits. While it may seem like the government should never spend more money than it takes in, the government almost always does. Since 1970, there has been a budget deficit every year except for the years 1998–2001 (during which there were budget surpluses, or revenues exceeding expenditures).
The federal budget deficit for the United States is normally hundreds of billions of dollars. While so much debt may seem troublesome to people, the United States’ total economy, also called the gross domestic product (GDP), is much larger than the federal budget deficit. The GDP amounts to many trillions of dollars every year, making a federal deficit of a few hundred billion dollars seem much smaller in comparison. Because of this, one common way to look at the federal budget deficit is as a percentage of the GDP. For example, the deficit in 2017 was $665 billion, although that was only 3.4 percent of GDP. In 2009, when the government passed a huge stimulus package to counteract the effects of the Great Recession, the deficit rose to 9.8 percent of the GDP, the highest proportion since World War II. That record was replaced in 2020 when the deficit was recorded at 14.9 percent of GDP. In 2020, the global COVID-19 pandemic caused a large increase in government spending to avoid a national depression.
Overview
The United States federal budget is a yearly document written by Congress and approved by the president. It details how much money the government expects to take in from taxes and fees (revenue) and how it plans to spend that money. The federal budget deficit is the amount of money the government spends in a given year beyond the revenue it takes in.
Most of the time, a lower deficit is good. It means that the government has to borrow less money to balance its budget. The government recorded a budget deficit every year from 1970 to 1997, and then from 2001 onward. The national debt is the accumulated total of all unpaid deficits held by the government. In 2024, the national debt was about $36.17 trillion.
Governments have many ways of quickly closing their deficits. For example, governments normally have the authority to print money. This means that if a government is $100 million short of its budget, it can just print that $100 million. However, this option is regarded as exceptionally poor economic policy, because printing more money causes inflation, meaning the value of each dollar decreases and prices increase. Tax increases are a much more responsible way to balance the federal budget. However, they are politically unpopular, as voters generally dislike paying more taxes, and higher taxes also tend to slow economic growth. Another way to balance the budget is to cut spending, but that can also be politically unpopular, because it means people get less in the way of government services.
A budget deficit is not always bad. Sometimes, it is a good economic decision for the government to borrow money. If the nation’s economy is in a recession, borrowing money to invest in businesses has the potential to speed up the recovery. If a war needs to be financed, borrowing money allows the government to continue the war effort. If infrastructure such as roads and bridges desperately need repairs, borrowing money could contribute to the long-term growth of the economy. These situations are all normal and expected for powerful nations. However, people expect deficits to shrink again once conditions have improved and the borrowed money has been repaid. Problems tend to occur when the deficit grows faster than the nation’s GDP, or when the government borrows so much money that it fails to repay its debts.
Throughout most of the 2000s, the federal deficit drastically rose. This was partly due to tax cuts for the wealthy during George W. Bush’s presidency. However, it was also due to the prolonged wars in Iraq and Afghanistan, coupled with a very severe economic depression. The recession reduced the federal government’s revenue from taxes while the wars proved extremely expensive. Additionally, bailout packages for businesses and stimulus packages to attempt to speed the economy’s recovery had to be paid for with money the government did not have. Although the budget deficit fell from a high of $1.4 trillion in 2009 to a low of $438 billion in 2015, deficits began rising again during the presidency of Donald Trump, after Congress passed a large tax cut in 2017. The pandemic of 2020 and 2021 also caused large increases to the deficit as the government attempted to stimulate the economy and help those out of work.
Bibliography
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"Deficit Tracker." Bipartisan Policy Center, bipartisanpolicy.org/report/deficit-tracker/. Accessed 14 Jan. 2025.
Irwin, Neil. “Congratulations, America! Your Deficit Fell 37 Percent in 2013.” Washington Post, 31 Oct. 2013, www.washingtonpost.com/blogs/wonkblog/wp/2013/10/30/congratulations-america-your-deficit-fell-37-percent-in-2013/. Accessed 14 Jan. 2025.
Johnson, Simon, and James Kwak. “National Debt for Beginners.” NPR, 4 Feb. 2009, www.npr.org/templates/story/story.php?storyId=99927343. Accessed 14 Jan. 2025.
“What is the National Debt?” US Treasury, 2024, fiscaldata.treasury.gov/americas-finance-guide/national-debt/. Accessed 14 Jan. 2025.