Borrowing and the Federal Debt Federal Budget 101 Facebook Twitter If federal revenues and government spending are equal in a given fiscal year, then the government has a balanced budget. If revenues are greater than spending, the result is a surplus. But if government spending is greater than tax collections, the result is a deficit. The federal government then must borrow money to fund its deficit spending. Deficit and Debt: What are they? While a deficit describes the relationship between spending and revenues in a single year, the federal debt – also referred to as the national debt – is the sum of all past deficits, minus the amount the federal government has since repaid. Every year in which the government runs a deficit, the money it borrows is added to the federal debt. If the government runs a surplus, it can use the extra money to pay down some of its debt. And each year, the government pays interest on the national debt as part of its overall spending. As of June 4, 2015, total U.S. debt stood at $18.153 trillion.
Why Does the Federal Government Borrow? The federal government has run a deficit in 45 out of the last 50 years. Usually that deficit is around three percent of the economy, as measured by Gross Domestic Product (GDP). The size of a budget deficit in any given year is determined by two factors: the amount of money the government spends that year and the amount of revenues the government collects in taxes. Both of these factors are affected by the state of the economy, as well as by the tax and spending policies enacted by Congress. For example, during tough economic times like the Great Recession, many types of government spending automatically increase because more people become eligible for need-based programs like food stamps and unemployment benefits. At the same time, tax revenues tend to decrease for a couple of reasons: people are working less, and paying less in taxes; and corporations also earn less profit, and they too pay less in taxes. What’s more, lawmakers may intentionally increase government spending during a recession in order to stimulate the economy, even though they know that one short-term result will be a deficit. During the Great Recession, the federal deficit in 2009 reached 9.8 percent of the economy, but in 2015 is about average again, at 3.2 percent of the economy. The deficit can also reflect temporary spikes in spending that are not matched by equal spikes in revenue (through increasing taxes, for instance). For example, the deficit in 1943 at the height of war spending on World War II reached nearly 30 percent of the economy. Finally, tax policy plays a major role in determining whether we run surpluses or deficits. Many factors probably contributed to the budget surpluses of the 1990s, but one of them was tax increases, which took the form of tax rate increases for the highest income taxpayers (although rates stayed well below what they had been prior to the 1980s). Likewise, major tax cuts in 2001 and 2003 were a major contributor to deficits over the last decade, and to today’s debt – by some measures, even more so than the economic downturn. This line chart shows the size of the deficit or surplus in each fiscal year over much of the last century. % of GDP